TSX Symbol:  WJX

TORONTO, Nov. 1, 2021 /CNW/ - Wajax Corporation ("Wajax" or the "Corporation") today announced its 2021 third quarter results.






(Dollars in millions, except per share data)

Three Months Ended
September 30


Nine Months Ended
September 30


2021

2020


2021

2020

CONSOLIDATED RESULTS






Revenue

$401.3

$340.6


$1,234.5

$1,041.6

Equipment sales

$104.7

$106.2


$364.5

$326.4

Product support

$114.3

$100.9


$334.8

$309.8

Industrial parts

$111.1

$83.8


$329.4

$257.1

ERS

$62.1

$41.7


$179.8

$123.8

Equipment rental

$9.2

$8.1


$26.0

$24.5







Net earnings

$14.7

$6.7


$45.3

$20.9

Basic earnings per share(1)

$0.68

$0.33


$2.13

$1.05







Adjusted net earnings(2)(3)

$15.5

$10.1


$44.5

$25.5

Adjusted basic earnings per share(1)(2)(3)

$0.72

$0.50


$2.09

$1.27

Third Quarter Highlights

  • Revenue in the third quarter of 2021 increased $60.7 million, or 17.8%, to $401.3 million, from $340.6 million in the third quarter of 2020. Regionally:

    • Revenue in western Canada of $177.4 million increased 36.9% over the prior year due primarily to higher revenue in the industrial parts and ERS categories, as well as higher mining and power systems product support revenue. The increase in industrial parts and ERS revenue was due mainly to the acquisition of Calgary, Alberta-based Tundra Process Solutions Ltd. ("Tundra") effective January 22, 2021.
    • Revenue in central Canada of $74.2 million increased 0.6% over the prior year primarily due to strength in industrial parts sales and ERS revenue, as well as higher power systems and mining product support revenue. These increases were offset partially by lower construction and forestry equipment sales.
    • Revenue in eastern Canada of $149.7 million increased 9.0% over the prior year primarily due to higher power systems equipment sales, industrial parts revenue and construction and forestry product support revenue.

  • During the quarter, the Corporation did not recognize any reimbursement of compensation expense from the Canada Emergency Wage Subsidy ("CEWS") program. During the same quarter last year, the Corporation qualified for the CEWS and recognized $5.4 million as a reimbursement of compensation expense with $2.6 million and $2.8 million, respectively, allocated to cost of sales and selling and administrative expenses in proportion to personnel costs recorded in those areas.

  • Gross profit margin of 21.2% in the third quarter of 2021 increased 2.4% compared to gross profit margin of 18.8% in the same period of 2020. Excluding the CEWS recoveries in the third quarter of last year of $2.6 million, gross profit margin in the third quarter of 2021 increased 3.2% compared to the gross profit margin of 18.0% in the same period of 2020. The increase in margin was driven primarily by higher equipment and parts margins, and a higher proportion of industrial parts and ERS sales compared to equipment sales.

  • Selling and administrative expenses as a percentage of revenue increased to 15.1% in the third quarter of 2021 from 12.3% in the third quarter of 2020. Excluding the CEWS recoveries in the third quarter of last year of $2.8 million, selling and administrative expenses as a percentage of revenue increased from 13.1% in the third quarter last year to 15.1% in the third quarter of 2021. Selling and administrative expenses in the third quarter of 2021 increased $18.5 million compared to the third quarter of 2020 due mainly to additional selling and administrative expenses related to Tundra, higher personnel costs as the volume of business increased over the prior year, amortization expense of $1.8 million relating to intangible assets recognized for the Tundra acquisition, and the prior year $2.8 million recovery of personnel expenses from the CEWS program without a similar recovery in the current year.

  • EBIT increased $10.4 million, or 72.4%, to $24.7 million in the third quarter of 2021 versus $14.3 million in the same period of 2020.(2) The year-over-year increase in EBIT is primarily attributable to higher volumes and margins, a higher proportion of industrial parts and ERS sales compared to equipment sales, and restructuring and other related costs in the prior year of $7.7 million.(2) These increases were offset partially by additional selling and administrative expenses related to Tundra, higher personnel costs as the volume of business increased over the prior year, and prior year recovery of personnel expenses from the CEWS program without a similar recovery in the current year.

  • The Corporation generated net earnings of $14.7 million, or $0.68 per share, in the third quarter of 2021 versus $6.7 million, or $0.33 per share, in the same period of 2020. The Corporation generated adjusted net earnings of $15.5 million, or $0.72 per share, in the third quarter of 2021 versus $10.1 million, or $0.50 per share, in the same period of 2020.(2)

  • Adjusted EBITDA margin increased to 10.1% in the third quarter of 2021 from 9.5% in the same period of 2020.(2)

  • The Corporation's backlog at September 30, 2021 of $371.5 million increased $54.7 million, or 17.3%, compared to June 30, 2021 due to higher orders in most categories, offset partially by lower ERS orders.(2) Compared to September 30, 2020, backlog increased $166.4 million, or 81.2%, due to higher orders in the construction and forestry, material handling, and power systems categories, and higher orders in the industrial parts and ERS categories with the addition of Tundra's backlog.(2)(4) These increases were offset partially by lower mining orders.

  • Total owned and net consignment inventory increased $2.4 million in the third quarter of 2021. Owned inventory of $371.3 million at September 30, 2021 decreased $5.1 million from June 30, 2021. Net consignment inventory, comprised primarily of construction excavators, increased by $7.5 million to $27.0 million during the quarter.

  • Working capital of $330.4 million at September 30, 2021 decreased $2.4 million from June 30, 2021, due primarily to lower inventories, higher accounts payable, and lower deposits on inventory, offset partially by higher trade and other receivables and higher contract assets.(2) Trailing four-quarter average working capital as a percentage of the trailing 12-month sales was 21.7%, a decrease of 1.8% from June 30, 2021, due to the combination of the lower four-quarter average working capital and the higher trailing 12-month sales.(2)

  • Cash flows generated from operating activities amounted to $40.2 million in the third quarter of 2021, compared to cash flows generated from operating activities of $34.8 million in the same quarter of the previous year. The increase in cash generated from operating activities of $5.4 million was mainly attributable to an increase in net earnings excluding items not affecting cash flow of $15.8 million, offset partially by a decrease in cash generated from changes in non-cash operating working capital of $7.5 million and an increase in income taxes paid of $3.0 million.

  • The Corporation's leverage ratio decreased to 1.39 times at September 30, 2021, compared to 1.73 times at June 30, 2021.(2) The decrease in the leverage ratio was due primarily to the lower debt level in the current period.(2) The Corporation's senior secured leverage ratio was 0.95 times at September 30, 2021, compared to 1.28 times at June 30, 2021.(2)

  • During the third quarter of 2021, the Corporation entered into sale and leaseback transactions for two of its owned properties. The proceeds net of transaction costs on the sale of the properties was $5.3 million, and the carrying amount was $0.6 million, resulting in a total gain on sale of the properties of $4.7 million, of which $0.1 million was recognized in the quarter and the remaining $4.6 million was deferred as a reduction of the right-of-use assets.

  • On August 19, 2021, Wajax and Hitachi Construction Machinery Loaders America Inc. ("Hitachi") announced that, effective March 1, 2022, the companies plan to expand their current Canadian direct distribution relationship to include construction excavators, mining equipment and related aftermarket parts. Since 2001, these products have been supplied to Wajax via a third-party joint venture partner to Hitachi Construction Machinery ("HCM"). It was announced by HCM and its partner earlier on August 19, 2021, that such joint venture would be dissolved, with an expected dissolution date of February 28, 2022.

    This change is expected to provide Wajax with enhanced access to product development, increased market responsiveness and improved reliability of equipment supply. It is also expected to increase Wajax and Hitachi market share by providing customers with better access to products which lead the market in terms of value, performance and reliability.

    Wajax and Hitachi will continue to work closely on transition planning leading up to March 1, 2022, and continue to expect significant long-term benefits from the expanded relationship. For more information, please see the Corporation's press release dated August 19, 2021.
  • The consignment program of HCM's joint venture partner, relating to construction-class excavators, ended October 31, 2021. Effective November 1, 2021, the Corporation began assuming ownership of new stock received. Inventory on hand as at October 31, 2021 will remain subject to the prior consignment terms, which include the opportunity for the Corporation to purchase the inventory prior to sale to a customer. Due to certain preferential terms being offered by the supplier, the Corporation plans to purchase all consignment inventory on hand as at October 31, 2021 during the fourth quarter of 2021. For inventory received from the supplier during the period from November 1, 2021 to February 28, 2022, extended payment terms will apply. Effective March 1, 2022, new payment terms from the manufacturer are expected to apply. The Corporation's existing credit facilities are expected to continue to be sufficient to support total normal course working capital requirements, including the effect of this change.

  • On October 5, 2021, the Corporation announced that Mark Foote will retire as President and Chief Executive Officer on December 31, 2021. Ignacy (Iggy) Domagalski, the Chief Executive Officer of Tundra, which was acquired by Wajax effective January 22, 2021, will be appointed President and Chief Executive Officer of Wajax upon Mr. Foote's retirement.

Wajax also today announced the appointment of Jane Craighead to its Board of Directors, effective immediately. Ms. Craighead is a corporate director currently serving on the boards of Jarislowsky Fraser Limited, Intertape Polymer Group Inc. and Crombie REIT. She also serves on the board of the McGill University Health Centre Foundation and is a Member of the Board of Regents of Mount Allison University. Ms. Craighead has many years of strategic human resources experience and was previously Senior Vice President, Global Human Resources at the Bank of Nova Scotia. Prior to that, she was the Global Practice Leader, Rewards at Rio Tinto Plc, and the Eastern Canada Human Capital Advisory Services Business Leader at Mercer Human Resources Consulting. Ms. Craighead holds a Ph.D. in Management and a Graduate Diploma in Accounting from McGill University, a Bachelor of Commerce degree (with distinction) from Mount Allison University and is a Chartered Professional Accountant.

"We are very pleased to welcome Ms. Craighead as a director," said Rob Dexter, Chairman of Wajax's Board of Directors. "We expect her in-depth expertise in strategic human resources, including change management, transformation and total rewards, to contribute significantly as Wajax continues on its path to becoming Canada's leading industrial products and services provider." In addition to her appointment as a director, Ms. Craighead was also appointed a member of the Audit Committee and the Human Resources and Compensation Committee of the Board of Directors.

On November 1, 2021, the Corporation declared a dividend of $0.25 per share for the fourth quarter of 2021 payable on January 5, 2022 to shareholders of record on December 15, 2021.

President and Chief Executive Officer Mark Foote stated, "In 2021, Wajax has been focused on protecting the health, safety and well-being of its team, providing excellent customer service, protecting the Corporation's financial health and driving its long-term growth strategy."

Commenting on financial expectations for 2021, Mr. Foote stated, "We expect revenue associated with the acquisition of Tundra to be a significant contributor to total revenue growth in 2021. To the end of the third quarter, general market conditions affecting organic growth have been better than the Corporation's expectations, resulting in improved revenue and margin rates. Wajax will continue to work closely with major suppliers in relation to inventory availability and supply chain service levels. Current challenges with equipment inventory availability in construction and forestry, material handling and power systems are expected to persist into the fourth quarter."

As to Wajax's key product and service categories, Mr. Foote commented, "Notwithstanding temporary supply chain issues in the Corporation's heavy equipment categories, we will continue to focus on success in construction and forestry, mining, material handling and power systems, including improvements in product support volumes. Wajax has excellent growth opportunities in these categories and will continue to work closely with its supplier partners to prudently grow market share and capture aftermarket sales. In the mining category, we continue to experience strong customer quoting activity.

In industrial parts and ERS, we expect strong growth, including the contribution from Tundra. ERS continues to be one of Wajax's most significant opportunities, capable of growth at each point in the economic cycle."

Regarding other key projects, Mr. Foote stated, "Wajax's infrastructure programs have continued in 2021, including branch network consolidation and technology investments. Following a COVID-19 related delay in 2020, the phased implementation of our new ERP system began in the second quarter of 2021. Full implementation is expected to occur over an approximate 24-month period to reduce associated risks."

Mr. Foote concluded, "On behalf of the leadership team, I would like to thank our employees for their resilience, hard work and significant effort in serving our customers as volumes have increased. We appreciate everyone's efforts to work safely and to focus on our first priority which is to protect the health, safety and well-being of our employees."

Wajax Corporation

Founded in 1858, Wajax (TSX: WJX) is one of Canada's longest-standing and most diversified industrial products and services providers. The Corporation operates an integrated distribution system providing sales, parts and services to a broad range of customers in diverse sectors of the Canadian economy, including: construction, forestry, mining, industrial and commercial, oil sands, transportation, metal processing, government and utilities, and oil and gas.

The Corporation's goal is to be Canada's leading industrial products and services provider, distinguished through its three core capabilities: sales force excellence, the breadth and efficiency of repair and maintenance operations, and the ability to work closely with existing and new vendor partners to constantly expand its product offering to customers. The Corporation believes that achieving excellence in these three areas will position it to create value for its customers, employees, vendors and shareholders.

Wajax will webcast its Third Quarter Financial Results Conference Call. You are invited to listen to the live webcast on Tuesday, November 2, 2021 at 2:00 p.m. ET. To access the webcast, please visit our website wajax.com, under "Investor Relations", "Events and Presentations", "Q3 2021 Financial Results" and click on the "Webcast" link.

Notes:

(1)

Weighted average shares, net of shares held in trust, outstanding for calculation of basic and diluted earnings per share for the three months ended September 30, 2021 was 21,409,323 (2020 – 20,033,619) and 22,075,170 (2020 – 20,513,331), respectively.


Weighted average shares, net of shares held in trust, outstanding for calculation of basic and diluted earnings per share for the nine months ended September 30, 2021 was 21,300,718 (2020 – 20,027,910) and 21,937,073 (2020 – 20,459,861), respectively.

(2)

"Adjusted net earnings", "Adjusted basic earnings per share", "Adjusted EBITDA", "Adjusted EBITDA margin", "pro-forma adjusted EBITDA", "backlog", "leverage ratio" and "senior secured leverage ratio" do not have standardized meanings prescribed by generally accepted accounting principles ("GAAP"). "EBIT" and "Working capital" are additional GAAP measures. See the Non-GAAP and Additional GAAP Measures section of the Q3 2021 Management's Discussion and Analysis.

(3)

Net earnings excluding the following:


a.

after-tax gain recorded on the sale of properties of $0.1 million (2020 - gain of $1.2 million), or basic and diluted earnings per share of less than $0.01 (2020 - $0.06 earnings per share) for the three months ended September 30, 2021.

b.

after-tax gain recorded on the sale of properties of $0.8 million (2020 - gain of $1.2 million), or basic and diluted earnings per share of $0.04 (2020 - $0.06 earnings per share) for the nine months ended September 30, 2021.

c.

after-tax non-cash losses on mark to market of derivative instruments of $0.9 million (2020 – gains of $1.0 million), or basic and diluted loss per share of $0.04 (2020 – $0.05 earnings per share) for the three months ended September 30, 2021.

d.

after-tax non-cash gains on mark to market of derivative instruments of $0.2 million (2020 – gains of $0.2 million), or basic and diluted earnings per share of $0.01 (2020 – $0.01 earnings per share) for the nine months ended September 30, 2021.

e.

after-tax Tundra transaction costs of $0.3 million (2020 - nil), or basic and diluted earnings per share of $0.01 (2020 - nil) for the nine months ended September 30, 2021.

f.

after-tax restructuring and other related costs of nil (2020 – $5.6 million), or basic and diluted earnings per share of nil (2020 – $0.28 and $0.27 respectively) for the three months ended September 30, 2021.

g.

after-tax restructuring and other related costs of nil (2020 – $5.7 million), or basic and diluted earnings per share of nil (2020 –$0.28) for the nine months ended September 30, 2021.

h.

after-tax NorthPoint Technical Services ULC ("NorthPoint") transaction costs of nil (2020 - $0.2 million), or basic and diluted earnings per share of nil (2020 - $0.01) for the nine months ended September 30, 2021.

(4)

The Corporation's backlog as at September 30, 2021 now includes customer purchase commitments for Groupe Delom Inc. ("Delom"), NorthPoint and Tundra, and therefore for comparability purposes customer purchase commitments for Delom and NorthPoint have been added to backlog as at September 30, 2020.

Cautionary Statement Regarding Forward-Looking Information

This news release contains certain forward-looking statements and forward-looking information, as defined in applicable securities laws (collectively, "forward-looking statements"). These forward-looking statements relate to future events or the Corporation's future performance. All statements other than statements of historical fact are forward-looking statements. Often, but not always, forward looking statements can be identified by the use of words such as "plans", "anticipates", "intends", "predicts", "expects", "is expected", "scheduled", "believes", "estimates", "projects" or "forecasts", or variations of, or the negatives of, such words and phrases or state that certain actions, events or results "may", "could", "would", "should", "might" or "will" be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors beyond the Corporation's ability to predict or control which may cause actual results, performance and achievements to differ materially from those anticipated or implied in such forward-looking statements. To the extent any forward-looking information in this news release constitutes future-oriented financial information or financial outlook within the meaning of applicable securities law, such information is being provided to demonstrate the potential of the Corporation and readers are cautioned that this information may not be appropriate for any other purpose. There can be no assurance that any forward-looking statement will materialize. Accordingly, readers should not place undue reliance on forward-looking statements. The forward-looking statements in this news release are made as of the date of this news release, reflect management's current beliefs and are based on information currently available to management. Although management believes that the expectations represented in such forward-looking statements are reasonable, there is no assurance that such expectations will prove to be correct. Specifically, this news release includes forward looking statements regarding, among other things, the planned expansion of our Canadian direct distribution relationship with Hitachi effective March 1, 2022, as well as the expected benefits of such expanded relationship, including enhanced access to product development, increased market responsiveness, improved reliability of equipment supply and increased market share; our intention to continue working with Hitachi on transition planning for our expanded direct distribution relationship, and our mutual continued expectation of significant long-term benefits from such relationship; the end of a consignment program relating to construction-class excavators received from HCM's joint venture partner, including our plans to purchase all consignment inventory on hand during the fourth quarter of 2021, our expectation that new credit terms from the manufacturer will apply effective March 1, 2022 and our expectation that our existing credit facilities will be sufficient to support normal course working capital requirements, including the effect of these changes; our expectation that revenue associated with the acquisition of Tundra will be a significant contributor to our total revenue growth in 2021; our continued intention to work closely with our major suppliers in relation to inventory availability and supply chain service levels; our expectation that current challenges with the availability of construction and forestry, material handling and power systems equipment inventory will persist into the fourth quarter; our plans to continue our focus on success in construction and forestry, mining, material handling and power systems, including improvements in product support volumes; our belief that we have excellent growth opportunities in the aforementioned heavy equipment categories and our intention to continue to work closely with our supplier partners to prudently grow market share and capture aftermarket sales; our expectation that our industrial parts and ERS categories will yield strong growth, including the contribution of Tundra, and that ERS continues to be one of Wajax's most significant opportunities, capable of growth at each point in the economic cycle; our plan to minimize the implementation risks associated with our new ERP system by conducting such implementation over a 24-month period; our goal of becoming Canada's leading industrial products and services provider, distinguished through our core capabilities; and our belief that achieving excellence in our areas of core capability will position Wajax to create value for its customers, employees, vendors and shareholders. These statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, our ability to successfully manage our business through the COVID-19 pandemic and actions taken by governments, public authorities, suppliers and customers in response to the novel coronavirus and its variants; the ability of HCM and its partner to dissolve their joint venture arrangements, including their ability to complete the steps necessary for such dissolution in a timely manner or at all, and to obtain any required approvals for, or consents to, such dissolution; the ability of Hitachi and Wajax to develop and execute successful sales, marketing and other plans related to their expanded direct distribution relationship; general business and economic conditions; the supply and demand for, and the level and volatility of prices for, oil, natural gas and other commodities; financial market conditions, including interest rates; our ability to execute our updated Strategic Plan, including our ability to develop our core capabilities, execute on our organic growth priorities, complete and effectively integrate acquisitions, such as Tundra, and to successfully implement new information technology platforms, systems and software, such as our new ERP system; the future financial performance of the Corporation; our costs; market competition; our ability to attract and retain skilled staff; our ability to procure quality products and inventory; and our ongoing relations with suppliers, employees and customers. The foregoing list of assumptions is not exhaustive. Factors that may cause actual results to vary materially include, but are not limited to, the geographic spread and ultimate impact of the COVID-19 virus and its variants, and the duration of the coronavirus pandemic; the duration and severity of travel, business and other restrictions imposed by governments and public authorities in response to COVID-19, as well as other measures that may be taken by such authorities; actions taken by our suppliers and customers in relation to the COVID-19 pandemic, including slowing, reducing or halting operations; the inability of HCM and its partner to dissolve their joint venture arrangements satisfactorily, including their inability to complete the steps necessary for such dissolution in a timely manner or at all, or the failure to obtain any required approvals for, or consents to, such dissolution on acceptable terms; the ability of Hitachi and Wajax to develop and execute successful sales, marketing and other plans related to their expanded direct distribution relationship; a continued or prolonged deterioration in general business and economic conditions (including as a result of the COVID-19 pandemic); volatility in the supply and demand for, and the level of prices for, oil, natural gas and other commodities; a continued or prolonged decrease in the price of oil or natural gas; fluctuations in financial market conditions, including interest rates; the level of demand for, and prices of, the products and services we offer; levels of customer confidence and spending; market acceptance of the products we offer; termination of distribution or original equipment manufacturer agreements; unanticipated operational difficulties (including failure of plant, equipment or processes to operate in accordance with specifications or expectations, cost escalation, our inability to reduce costs in response to slow-downs in market activity, unavailability of quality products or inventory, supply disruptions (including disruptions caused by the COVID-19 pandemic), job action and unanticipated events related to health, safety and environmental matters); our ability to attract and retain skilled staff and our ability to maintain our relationships with suppliers, employees and customers. The foregoing list of factors is not exhaustive. Further information concerning the risks and uncertainties associated with these forward-looking statements and the Corporation's business may be found in our Annual Information Form for the year ended December 31, 2020 (the "AIF"), in our annual MD&A for financial risks, and in our most recent quarterly MD&A, all of which have been filed on SEDAR. The forward-looking statements contained in this news release are expressly qualified in their entirety by this cautionary statement. The Corporation does not undertake any obligation to publicly update such forward-looking statements to reflect new information, subsequent events or otherwise unless so required by applicable securities laws.

Readers are cautioned that the risks described in the AIF, and in our annual and quarterly MD&A, are not the only risks that could impact the Corporation. We cannot accurately predict the full impact that COVID-19 will have on our business, results of operations, financial condition or the demand for our products and services due to the uncertainties related to the spread of the virus and its variants. Risks and uncertainties not currently known to the Corporation, or currently deemed to be immaterial, may have a material effect on the Corporation's business, financial condition or results of operations.

Additional information, including Wajax's Annual Report, is available on SEDAR at www.sedar.com. 

Wajax Corporation
Management's Discussion and Analysis – Q3 2021
The following management's discussion and analysis ("MD&A") discusses the consolidated financial condition and results of operations of Wajax Corporation ("Wajax" or the "Corporation") for the quarter ended September 30, 2021. This MD&A should be read in conjunction with the information contained in the unaudited condensed consolidated interim financial statements and accompanying notes for the quarter ended September 30, 2021, the annual audited consolidated financial statements and accompanying notes for the year ended December 31, 2020 that are prepared in accordance with International Financial Reporting Standards ("IFRS") and the associated MD&A. Information contained in this MD&A is based on information available to management as of November 1, 2021.

Management is responsible for the information disclosed in this MD&A and the unaudited condensed consolidated interim financial statements and accompanying notes, and has in place appropriate information systems, procedures and controls to ensure that information used internally by management and disclosed externally is materially complete and reliable. Wajax's Board of Directors has approved this MD&A and the unaudited condensed consolidated interim financial statements and accompanying notes. In addition, Wajax's Audit Committee, on behalf of the Board of Directors, provides an oversight role with respect to all public financial disclosures made by Wajax and has reviewed this MD&A and the unaudited condensed consolidated interim financial statements and accompanying notes.

Unless otherwise indicated, all financial information within this MD&A is in millions of Canadian dollars, except ratio calculations, share, share rights and per share data. Additional information, including Wajax's Annual Report and Annual Information Form, are available on SEDAR at www.sedar.com.

Wajax Corporation Overview
Founded in 1858, Wajax (TSX: WJX) is one of Canada's longest-standing and most diversified industrial products and services providers. The Corporation operates an integrated distribution system, providing sales, parts and services to a broad range of customers in diverse sectors of the Canadian economy, including: construction, forestry, mining, industrial and commercial, oil sands, transportation, metal processing, government and utilities, and oil and gas.

Strategic Direction and Outlook
The goal of the One Wajax strategy is to provide customers with access to the Corporation's full range of products and services while delivering a consistently excellent level of customer service. Wajax is focused on delivering a strong experience for its customers and employees through the execution of clear plans in five key areas:

  • Investing in the Wajax team - The safety, well-being and engagement of the Corporation's team of approximately 2,690 employees is the foundation of the Corporation.

  • Investing in Wajax customers - The Corporation has the privilege of supporting 32,000 individual customers across Canada ranging from small local contractors to the country's largest industrial and resource organizations.

  • Executing a clear organic growth strategy - The Corporation has organic growth opportunities in each of its Heavy Equipment and Industrial Parts and Services categories. Heavy Equipment categories include construction and forestry, mining, material handling and power systems which collectively serve a broad range of customer capital equipment and related product support needs. Industrial Parts and Services categories include industrial parts and Engineered Repair Services ("ERS") which collectively serve a broad range of customer fixed plant maintenance, repair and reliability needs.

  • Accretive acquisitions strategy - Acquisitions are an important aspect of the Corporation's growth strategy. Primarily, the Corporation focuses on acquisitions that add to the breadth and scale of Industrial Parts and Services. Wajax's national infrastructure and extensive customer relationships position the Corporation as an aggregator in the highly fragmented ERS and related Industrial Parts market. Secondarily, the Corporation considers acquisitions in Heavy Equipment categories where extensions to existing major distribution relationships are enhanced.

  • Investing in the Wajax infrastructure - The Corporation invests in its infrastructure to improve the consistency of customer service and lower costs. The Corporation's current programs include the ongoing consolidation of its branch network, investing in new information systems and implementing Customer Support Centres (each a "CSC") that provide 24/7 customer support in all product and service categories.

In addition to the above and to meet the Corporation's long-term sustainability goals, the Corporation has introduced a more comprehensive sustainability program as outlined below and further discussed in the Corporation's  2020 Annual Report:  

Sustainability Roadmap

Areas

Goals



Employee Health, Safety and Wellness

Provide every employee with a healthy and safe working environment that supports their entire well-being: physical, psychological and financial.



Training and Development

Attract, engage, train, develop and retain the best people across all levels of the organization from entry level positions to senior leadership.



Diversity and Equal Opportunity

Attract, retain and develop a diverse and skilled workforce that best reflects Canadian society, and provide a work environment that values and utilizes the contributions of employees' diverse backgrounds, experiences and perspectives.



Sustainable Products

and Services

Commit to a continuous process of understanding customer needs and leveraging technology, Wajax expertise and vendor partnerships to deliver sustainable solutions that reduce energy consumption, improve safety and reduce waste.



Environmental Responsibility

Ensure operations are managed to minimize their impact on the environment, focusing on initiatives that lower energy intensity and reduce waste.



Governance

Maintain a reputation for fair dealing and integrity and demonstrate ongoing commitment to upholding high ethical standards in the conduct of the Corporation's business.



Community

Invest in and contribute to the communities that the Corporation operates in across the country through a combination of volunteer hours, fundraising, and in-kind donations.

Outlook
In 2021, Wajax has been focused on protecting the health, safety and well-being of its team, providing excellent customer service, protecting the Corporation's financial health and driving its long-term growth strategy.

The Corporation expects revenue associated with the acquisition of Tundra Process Solutions Ltd. ("Tundra") to be a significant contributor to total revenue growth in 2021. To the end of the third quarter, general market conditions affecting organic growth have been better than the Corporation's expectations, resulting in improved revenue and margin rates. Wajax will continue to work closely with major suppliers in relation to inventory availability and supply chain service levels. Current challenges with equipment inventory availability in construction and forestry, material handling and power systems are expected to persist into the fourth quarter. 

Notwithstanding temporary supply chain issues in the Corporation's heavy equipment categories, Wajax will continue to focus on success in construction and forestry, mining, material handling and power systems, including improvements in product support volumes. Wajax has excellent growth opportunities in these categories and will continue to work closely with its supplier partners to prudently grow market share and capture aftermarket sales. In the mining category, the Corporation has continued to experience strong customer quoting activity.

In industrial parts and ERS, Wajax expects strong growth, including the contribution from Tundra. ERS continues to be one of the Corporation's most significant opportunities, capable of growth at each point in the economic cycle.

The Corporation's infrastructure programs have continued in 2021, including branch network consolidation and technology investments. Following a COVID-19 related delay in 2020, the phased implementation of the Corporation's new ERP system began in the second quarter of 2021. Full implementation is expected to occur over an approximate 24-month period to reduce associated risks.

See the Cautionary Statement Regarding Forward-Looking Information section.

Highlights for the Quarter

  • Revenue in the third quarter of 2021 increased $60.7 million, or 17.8%, to $401.3 million, from $340.6 million in the third quarter of 2020. Regionally:

    • Revenue in western Canada of $177.4 million increased 36.9% over the prior year due primarily to higher revenue in the industrial parts and ERS categories, as well as higher mining and power systems product support revenue. The increase in industrial parts and ERS revenue was due mainly to the acquisition of Calgary, Alberta-based Tundra effective January 22, 2021.
    • Revenue in central Canada of $74.2 million increased 0.6% over the prior year primarily due to strength in industrial parts sales and ERS revenue, as well as higher power systems and mining product support revenue. These increases were offset partially by lower construction and forestry equipment sales.
    • Revenue in eastern Canada of $149.7 million increased 9.0% over the prior year primarily due to higher power systems equipment sales, industrial parts revenue and construction and forestry product support revenue.

  • During the quarter, the Corporation did not recognize any reimbursement of compensation expense from the Canada Emergency Wage Subsidy ("CEWS") program. During the same quarter last year, the Corporation qualified for the CEWS and recognized $5.4 million as a reimbursement of compensation expense with $2.6 million and $2.8 million, respectively, allocated to cost of sales and selling and administrative expenses in proportion to personnel costs recorded in those areas.

  • Gross profit margin of 21.2% in the third quarter of 2021 increased 2.4% compared to gross profit margin of 18.8% in the same period of 2020. Excluding the CEWS recoveries in the third quarter of last year of $2.6 million, gross profit margin in the third quarter of 2021 increased 3.2% compared to the gross profit margin of 18.0% in the same period of 2020. The increase in margin was driven primarily by higher equipment and parts margins, and a higher proportion of industrial parts and ERS sales compared to equipment sales.

  • Selling and administrative expenses as a percentage of revenue increased to 15.1% in the third quarter of 2021 from 12.3% in the third quarter of 2020. Excluding the CEWS recoveries in the third quarter of last year of $2.8 million, selling and administrative expenses as a percentage of revenue increased from 13.1% in the third quarter last year to 15.1% in the third quarter of 2021. Selling and administrative expenses in the third quarter of 2021 increased $18.5 million compared to the third quarter of 2020 due mainly to additional selling and administrative expenses related to Tundra, higher personnel costs as the volume of business increased over the prior year, amortization expense of $1.8 million relating to intangible assets recognized for the Tundra acquisition, and the prior year $2.8 million recovery of personnel expenses from the CEWS program without a similar recovery in the current year.

  • EBIT increased $10.4 million, or 72.4%, to $24.7 million in the third quarter of 2021 versus $14.3 million in the same period of 2020.(1) The year-over-year increase in EBIT is primarily attributable to higher volumes and margins, a higher proportion of industrial parts and ERS sales compared to equipment sales, and restructuring and other related costs in the prior year of $7.7 million. These increases were offset partially by additional selling and administrative expenses related to Tundra, higher personnel costs as the volume of business increased over the prior year, and prior year recovery of personnel expenses from the CEWS program without a similar recovery in the current year.

  • The Corporation generated net earnings of $14.7 million, or $0.68 per share, in the third quarter of 2021 versus $6.7 million, or $0.33 per share, in the same period of 2020. The Corporation generated adjusted net earnings of $15.5 million, or $0.72 per share, in the third quarter of 2021 versus $10.1 million, or $0.50 per share, in the same period of 2020.(1)

  • Adjusted EBITDA margin increased to 10.1% in the third quarter of 2021 from 9.5% in the same period of 2020.(1)

  • The Corporation's backlog at September 30, 2021 of $371.5 million increased $54.7 million, or 17.3%, compared to June 30, 2021 due to higher orders in most categories, offset partially by lower ERS orders.(1) Compared to September 30, 2020, backlog increased $166.4 million, or 81.2%, due to higher orders in the construction and forestry, material handling, and power systems categories, and higher orders in the industrial parts and ERS categories with the addition of Tundra's backlog.(1)(2) These increases were offset partially by lower mining orders.

  • Total owned and net consignment inventory increased $2.4 million in the third quarter of 2021. Owned inventory of $371.3 million at September 30, 2021 decreased $5.1 million from June 30, 2021. Net consignment inventory, comprised primarily of construction excavators, increased by $7.5 million to $27.0 million during the quarter.

  • Working capital of $330.4 million at September 30, 2021 decreased $2.4 million from June 30, 2021, due primarily to lower inventories, higher accounts payable, and lower deposits on inventory, offset partially by higher trade and other receivables and higher contract assets.(1) Trailing four-quarter average working capital as a percentage of the trailing 12-month sales was 21.7%, a decrease of 1.8% from June 30, 2021, due to the combination of the lower four-quarter average working capital and the higher trailing 12-month sales.(1)

  • Cash flows generated from operating activities amounted to $40.2 million in the third quarter of 2021, compared to cash flows generated from operating activities of $34.8 million in the same quarter of the previous year. The increase in cash generated from operating activities of $5.4 million was mainly attributable to an increase in net earnings excluding items not affecting cash flow of $15.8 million, offset partially by a decrease in cash generated from changes in non-cash operating working capital of $7.5 million and an increase in income taxes paid of $3.0 million.

  • The Corporation's leverage ratio decreased to 1.39 times at September 30, 2021, compared to 1.73 times at June 30, 2021.(1) The decrease in the leverage ratio was due primarily to the lower debt level in the current period.(1) The Corporation's senior secured leverage ratio was 0.95 times at September 30, 2021, compared to 1.28 times at June 30, 2021.(1)

  • During the third quarter of 2021, the Corporation entered into sale and leaseback transactions for two of its owned properties. The proceeds net of transaction costs on the sale of the properties was $5.3 million, and the carrying amount was $0.6 million, resulting in a total gain on sale of the properties of $4.7 million, of which $0.1 million was recognized in the quarter and the remaining $4.6 million was deferred as a reduction of the right-of-use assets.

  • On August 19, 2021, Wajax and Hitachi Construction Machinery Loaders America Inc. ("Hitachi") announced that, effective March 1, 2022, the companies plan to expand their current Canadian direct distribution relationship to include construction excavators, mining equipment and related aftermarket parts. Since 2001, these products have been supplied to Wajax via a third-party joint venture partner to Hitachi Construction Machinery ("HCM"). It was announced by HCM and its partner earlier on August 19, 2021, that such joint venture would be dissolved, with an expected dissolution date of February 28, 2022.

    This change is expected to provide Wajax with enhanced access to product development, increased market responsiveness and improved reliability of equipment supply. It is also expected to increase Wajax and Hitachi market share by providing customers with better access to products which lead the market in terms of value, performance and reliability.

    Wajax and Hitachi will continue to work closely on transition planning leading up to March 1, 2022, and continue to expect significant long-term benefits from the expanded relationship. For more information, please see the Corporation's press release dated August 19, 2021.

  • The consignment program of HCM's joint venture partner, relating to construction-class excavators, ended October 31, 2021. Effective November 1, 2021, the Corporation began assuming ownership of new stock received. Inventory on hand as at October 31, 2021 will remain subject to the prior consignment terms, which include the opportunity for the Corporation to purchase the inventory prior to sale to a customer. Due to certain preferential terms being offered by the supplier, the Corporation plans to purchase all consignment inventory on hand as at October 31, 2021 during the fourth quarter of 2021. For inventory received from the supplier during the period from November 1, 2021 to February 28, 2022, extended payment terms will apply. Effective March 1, 2022, new payment terms from the manufacturer are expected to apply. The Corporation's existing credit facilities are expected to continue to be sufficient to support total normal course working capital requirements, including the effect of this change.

  • On October 5, 2021, the Corporation announced that Mark Foote will retire as President and Chief Executive Officer on December 31, 2021. Ignacy (Iggy) Domagalski, the Chief Executive Officer of Tundra, which was acquired by Wajax effective January 22, 2021, will be appointed President and Chief Executive Officer of Wajax upon Mr. Foote's retirement.

  • Wajax announced the appointment of Jane Craighead to its Board of Directors, effective November 1, 2021.

    Ms. Craighead is a corporate director currently serving on the boards of Jarislowsky Fraser Limited, Intertape Polymer Group Inc. and Crombie REIT. She also serves on the board of the McGill University Health Centre Foundation and is a Member of the Board of Regents of Mount Allison University. Ms. Craighead has many years of strategic human resources experience and was previously Senior Vice President, Global Human Resources at the Bank of Nova Scotia. Prior to that, she was the Global Practice Leader, Rewards at Rio Tinto Plc, and the Eastern Canada Human Capital Advisory Services Business Leader at Mercer Human Resources Consulting. Ms. Craighead holds a Ph.D. in Management and a Graduate Diploma in Accounting from McGill University, a Bachelor of Commerce degree (with distinction) from Mount Allison University and is a Chartered Professional Accountant.

    In addition to her appointment as a director, Ms. Craighead was also appointed a member of the Audit Committee and the Human Resources and Compensation Committee of the Board of Directors.

Notes:




(1)

"Backlog", "Leverage ratio", "Senior secured leverage ratio", "Adjusted net earnings", "Adjusted EBITDA", "Adjusted EBITDA margin" and "Pro-forma adjusted EBITDA" do not have standardized meanings prescribed by generally accepted accounting principles ("GAAP"). "EBIT" and "Working capital" are additional GAAP measures. See the Non-GAAP and Additional GAAP Measures section.

(2)

The Corporation's backlog as at September 30, 2021 now includes customer purchase commitments for Groupe Delom Inc. ("Delom"), NorthPoint Technical Services ULC ("NorthPoint") and Tundra, and therefore for comparability purposes customer purchase commitments for Delom and NorthPoint have been added to backlog as at September 30, 2020.

Summary of Operating Results





Three months ended
September 30

Nine months ended
September 30

Statement of earnings highlights

2021

2020

2021

2020

Revenue

$

401.3

$

340.6

$

1,234.5

$

1,041.6

Gross profit

$

85.1

$

63.9

$

250.0

$

192.8

Selling and administrative expenses


60.4


41.9


173.0


139.3

Restructuring and other related costs



7.7



7.8

Earnings before finance costs and income taxes(1)

$

24.7

$

14.3

$

77.0

$

45.7

Finance costs


4.5


5.1


14.6


16.9

Earnings before income taxes(1)

$

20.2

$

9.2

$

62.3

$

28.8

Income tax expense


5.5


2.5


17.1


7.9

Net earnings

$

14.7

$

6.7

$

45.3

$

20.9

–  Basic earnings per share(2)

$

0.68

$

0.33

$

2.13

$

1.05

–  Diluted earnings per share(2)


0.66


0.33


2.06


1.02

Adjusted net earnings(1)(3)

$

15.5

$

10.1

$

44.5

$

25.5

–  Adjusted basic earnings per share(1)(2)(3)

$

0.72

$

0.50

$

2.09

$

1.27

–  Adjusted diluted earnings per share(1)(2)(3)


0.70


0.49


2.03


1.24

Adjusted EBITDA(1)

$

40.7

$

32.4

$

117.2

$

91.0

Key ratios:









Gross profit margin


21.2%


18.8%


20.3%


18.5%

Selling and administrative expenses as a percentage of revenue


15.1%


12.3%


14.0%


13.4%

EBIT margin(1)


6.2%


4.2%


6.2%


4.4%

Adjusted EBITDA margin(1)


10.1%


9.5%


9.5%


8.7%

Effective income tax rate


27.3%


27.4%


27.4%


27.4%

 

Statement of financial position highlights

As at

September 30
2021

June 30
2021

December 31
2020

Trade and other receivables

$

221.7

$

209.7

$

214.5

Inventory


371.3


376.4


357.4

Accounts payable and accrued liabilities


(289.1)


(271.2)


(231.7)

Other working capital amounts(1)


26.6


18.0


36.0

Working capital(1)

$

330.4

$

332.8

$

376.2

Rental equipment

$

48.4

$

50.4

$

56.9

Property, plant and equipment

$

40.5

$

41.3

$

41.4

Funded net debt(1)

$

166.9

$

197.4

$

219.6

Key ratios:







Leverage ratio(1)


1.39


1.73


2.28

Senior secured leverage ratio(1)


0.95


1.28


1.73

(1)

These measures do not have a standardized meaning prescribed by GAAP. See the Non-GAAP and Additional GAAP Measures section.

(2)

Weighted average shares, net of shares held in trust outstanding for calculation of basic and diluted earnings per share for the three months ended September 30, 2021 was 21,409,323 (2020 – 20,033,619) and 22,075,170 (2020 – 20,513,331), respectively.
Weighted average shares, net of shares held in trust, outstanding for calculation of basic and diluted earnings per share for the nine months ended September 30, 2021 was 21,300,718 (2020 – 20,027,910) and 21,937,073 (2020 – 20,459,861), respectively.

(3)

Net earnings excluding the following:


a.

after-tax gain recorded on the sale of properties of $0.1 million (2020 - gain of $1.2 million), or basic and diluted earnings per share of less than $0.01 (2020 - $0.06 earnings per share) for the three months ended September 30, 2021.


b.

after-tax gain recorded on the sale of properties of $0.8 million (2020 - gain of $1.2 million), or basic and diluted earnings per share of $0.04 (2020 - $0.06 earnings per share) for the nine months ended September 30, 2021.


c.

after-tax non-cash losses on mark to market of derivative instruments of $0.9 million (2020 – gains of $1.0 million), or basic and diluted loss per share of $0.04 (2020 – $0.05 earnings per share) for the three months ended September 30, 2021.


d.

after-tax non-cash gains on mark to market of derivative instruments of $0.2 million (2020 – gains of $0.2 million), or basic and diluted earnings per share of $0.01 (2020 – $0.01 earnings per share) for the nine months ended September 30, 2021.


e.

after-tax Tundra transaction costs of $0.3 million (2020 - nil), or basic and diluted earnings per share of $0.01 (2020 - nil) for the nine months ended September 30, 2021.


f.

after-tax restructuring and other related costs of nil (2020 – $5.6 million), or basic and diluted earnings per share of nil (2020 – $0.28 and $0.27 respectively) for the three months ended September 30, 2021.


g.

after-tax restructuring and other related costs of nil (2020 – $5.7 million), or basic and diluted earnings per share of nil (2020 –$0.28) for the nine months ended September 30, 2021.


h.

after-tax NorthPoint transaction costs of nil (2020 - $0.2 million), or basic and diluted earnings per share of nil (2020 - $0.01) for the nine months ended September 30, 2021.


Results of Operations

Revenue Sources


Three months ended
September 30

Nine months ended
September 30


2021

2020

2021

2020

Equipment sales

$

104.7

$

106.2

$

364.5

$

326.4

Product support


114.3


100.9


334.8


309.8

Industrial parts


111.1


83.8


329.4


257.1

ERS


62.1


41.7


179.8


123.8

Equipment rental


9.2


8.1


26.0


24.5

Total revenue

$

401.3

$

340.6

$

1,234.5

$

1,041.6

Revenue in the third quarter of 2021 increased 17.8%, or $60.7 million, to $401.3 million from $340.6 million in the third quarter of 2020. In addition to regional revenue commentary provided previously herein, the following factors contributed to the increase in revenue:

  • Product support revenue has increased due primarily to higher mining and power systems revenue in western Canada, and higher construction and forestry revenue in western and eastern Canada.

  • Industrial parts revenue has increased due primarily to the acquisition of Tundra in western Canada effective January 22, 2021, and organic strength in bearings sales in all regions.

  • ERS revenue has increased due primarily to the acquisition of Tundra in western Canada, and higher Delom sales in eastern Canada.

For the nine months ended September 30, 2021, revenue increased 18.5%, or $192.9 million, to $1,234.5 million, from $1,041.6 million in the same period of 2020. The following factors contributed to the increase in revenue:

  • Equipment sales have increased due mainly to strength in construction and forestry sales across all regions and higher mining sales in western Canada. These increases were offset partially by lower mining sales in eastern Canada and lower material handling sales in central Canada.

  • Product support sales have increased primarily on higher construction and forestry revenue in western and eastern Canada, higher power systems revenue in eastern and central Canada and higher material handling sales in eastern and western Canada.

  • Industrial parts sales have increased due mainly to the acquisition of Tundra effective January 22, 2021 and organic strength in bearings and hydraulics sales in all regions, but primarily in western and eastern Canada.

  • ERS sales have increased due to strength in all regions, but primarily in western Canada. The higher ERS revenue in western Canada was driven primarily by the acquisition of Tundra.

Backlog
Backlog of $371.5 million at September 30, 2021 increased $54.7 million, or 17.3%, compared to June 30, 2021 due to higher orders in most categories, offset partially by lower ERS orders. The Corporation's backlog at September 30, 2021 of $371.5 million increased $166.4 million, or 81.2%, compared to September 30, 2020 due to higher orders in the construction and forestry, material handling, and power systems categories, and higher orders in the industrial parts and ERS categories with the addition of Tundra's backlog.(1) These increases were offset partially by lower mining orders.

Canada Emergency Wage Subsidy (CEWS)
During the third quarter, the Corporation did not recognize any reimbursement of compensation expense from the CEWS program. During the same quarter last year, the Corporation qualified for the CEWS and recognized $5.4 million as a reimbursement of compensation expense with $2.6 million and $2.8 million, respectively, allocated to cost of sales and selling and administrative expenses in proportion to personnel costs recorded in those areas.

For the nine months ended September 30, 2021, the Corporation recognized $8.4 million as a reimbursement of compensation expense from the CEWS program with $3.7 million and $4.7 million, respectively, allocated to cost of sales and selling and administrative expenses in proportion to personnel costs recorded in those areas. Approximately $4.0 million of the subsidy was allocated to future employee compensation programs which include frontline special bonuses. The resultant net pre-tax contribution to earnings of the CEWS recovery for the nine months ended September 30, 2021 was approximately $4.4 million. During the same period last year, the Corporation recognized $20.9 million as a reimbursement of compensation expense from the CEWS program with $9.7 million and $11.2 million, respectively, allocated to cost of sales and selling and administrative expenses in proportion to personnel costs recorded in those areas.

Gross profit
Gross profit increased $21.2 million, or 33.1%, in the third quarter of 2021 compared to the same quarter last year due to higher volumes and margins, and a higher proportion of parts and service sales compared to equipment sales. These increases were offset partially by the prior year recovery of personnel expenses from the CEWS program without a similar recovery in the current year.

Gross profit margin of 21.2% in the third quarter of 2021 increased 2.4% compared to gross profit margin of 18.8% in the same period of 2020. Excluding the CEWS recoveries in the third quarter of last year of $2.6 million, gross profit margin in the third quarter of 2021 increased 3.2% compared to the gross profit margin of 18.0% in the same period of 2020. The increase in margin was driven primarily by higher equipment and parts margins, and a higher proportion of industrial parts and ERS sales compared to equipment sales.

For the nine months ended September 30, 2021, gross profit increased $57.2 million, or 29.7%, compared to the same period last year due to increased volumes and margins, and a higher proportion of industrial parts and ERS sales compared to equipment sales. These increases were offset partially by a lower recovery of personnel expenses from the CEWS program.

For the nine months ended September 30, 2021, gross profit margin of 20.3% increased 1.7% compared to gross profit margin of 18.5% in the same period last year. Excluding the CEWS recoveries for the nine months ended September 30, 2021 and for the same period of 2020 of $3.7 million and $9.7 million respectively, gross profit margin was 20.0%, representing an increase of 2.4% compared to the gross profit margin of 17.6% in the same period of 2020. The increase in margin was driven primarily by higher equipment and parts margins, and a higher proportion of industrial parts and ERS sales compared to equipment sales. The higher equipment margins were partially driven by the accelerated disposal of aged and used equipment in the prior year.

Selling and administrative expenses
Selling and administrative expenses in the third quarter of 2021 increased $18.5 million compared to the third quarter of 2020 due mainly to additional selling and administrative expenses related to Tundra, higher personnel costs as the volume of business increased over the prior year, amortization expense of $1.8 million relating to intangible assets recognized for the Tundra acquisition, and the prior year $2.8 million recovery of personnel expenses from the CEWS program without a similar recovery in the current year. Selling and administrative expenses as a percentage of revenue increased to 15.1% in the third quarter of 2021 from 12.3% in the third quarter of 2020. Excluding the CEWS recoveries in the third quarter of last year of $2.8 million, selling and administrative expenses as a percentage of revenue increased from 13.1% in the third quarter last year to 15.1% in the third quarter of 2021.

For the nine months ended September 30, 2021, selling and administrative expenses increased $33.8 million compared to the same period last year. This increase was due mainly to additional selling and administrative expenses related to Tundra, higher personnel costs as the volume of business increased over the prior year, amortization expense of $1.8 million relating to intangible assets recognized for the Tundra acquisition, and a lower recovery of personnel expenses from the CEWS program of $6.5 million. Selling and administrative expenses as a percentage of revenue increased to 14.0% in 2021 from 13.4% in 2020. Excluding the CEWS recoveries for the nine months ended September 30, 2021 and for the same period of 2020, of $4.7 million and $11.2 million respectively, selling and administrative expenses as a percentage of revenue remained consistent at 14.4%.

Finance costs
Finance costs of $4.5 million in the third quarter of 2021 decreased $0.6 million compared to the same quarter last year due primarily to lower average borrowings under the bank credit facility. See the Liquidity and Capital Resources section.

For the nine months ended September 30, 2021, finance costs of $14.6 million decreased $2.3 million compared to the same period in 2020 due primarily to lower average borrowings under the bank credit facility. See the Liquidity and Capital Resources section.

Income tax expense
The Corporation's effective income tax rate of 27.3% for the third quarter of 2021 was higher compared to the statutory rate of 26.2% due mainly to the impact of expenses not deductible for tax purposes. The Corporation's effective income tax rate of 27.4% for the third quarter of 2020 was higher compared to the statutory rate of 26.5% due mainly to the impact of expenses not deductible for tax purposes.

The Corporation's effective income tax rate of 27.4% for the nine months ended September 30, 2021 was higher compared to the statutory rate of 26.2% due mainly to the impact of expenses not deductible for tax purposes. The Corporation's effective income tax rate of 27.4% for the same period in 2020 was higher compared to the statutory rate of 26.5% due mainly to the impact of expenses not deductible for tax purposes.

Net earnings
In the third quarter of 2021, the Corporation had net earnings of $14.7 million, or $0.68 per share, compared to $6.7 million, or $0.33 per share, in the third quarter of 2020. The $8.0 million increase in net earnings resulted primarily from higher volumes and margins, a higher proportion of industrial parts and ERS sales compared to equipment sales, and restructuring and other related costs in the prior year of $7.7 million. These increases were offset partially by additional selling and administrative expenses related to Tundra, higher personnel costs as the volume of business increased over the prior year, and the prior year recovery of personnel expenses from the CEWS program without a similar recovery in the current year.

For the nine months ended September 30, 2021, the Corporation generated net earnings of $45.3 million, or $2.13 per share, compared to $20.9 million, or $1.05 per share, in the same period of 2020. The $24.3 million increase in net earnings resulted primarily from increased volumes and margins, a higher proportion of industrial parts and ERS sales compared to equipment sales, and restructuring and other related costs in the prior year of $7.8 million. These increases were offset partially by additional selling and administrative expenses related to Tundra, higher personnel costs as the volume of business increased over the prior year, and a lower recovery of personnel expenses from the CEWS program.

Adjusted net earnings (See the Non-GAAP and Additional GAAP Measures section)
Adjusted net earnings for the three months ended September 30, 2021 excludes a gain recorded on the sale of properties of $0.1 million after-tax, or less than $0.01 per share (2020 - gain of $1.2 million after-tax, or $0.06 per share), and non-cash losses on mark to market of derivative instruments of $0.9 million after-tax, or $0.04 per share (2020 - gains of $1.0 million after-tax, or $0.05 per share). Adjusted net earnings in the same period of 2020 also excludes restructuring and other related costs of $5.6 million after-tax, or $0.28 per share.

As such, adjusted net earnings increased $5.4 million to $15.5 million, or $0.72 per share, in the third quarter of 2021 from $10.1 million, or $0.50 per share, in the same period of 2020.

Adjusted net earnings for the nine months ended September 30, 2021 excludes a gain recorded on the sale of properties of $0.8 million after-tax, or $0.04 per share (2020 - gain of $1.2 million after-tax, or $0.06 per share), non-cash gains on mark to market of derivative instruments of $0.2 million after-tax, or $0.01 per share (2020 – gains of $0.2 million after-tax, or $0.01 per share), and Tundra transaction costs of $0.3 million after-tax, or $0.01 per share (2020 - nil). Adjusted net earnings in the same period of 2020 also excludes restructuring and other related costs of $5.7 million after-tax, or $0.28 per share, and NorthPoint transaction costs of $0.2 million after-tax, or $0.01 per share.

As such, adjusted net earnings increased $19.1 million to $44.5 million, or $2.09 per share, for the nine months ended September 30, 2021 from $25.5 million, or $1.27 per share, in the same period of 2020.

Comprehensive income
Total comprehensive income of $16.2 million in the third quarter of 2021 included net earnings of $14.7 million and an other comprehensive gain of $1.5 million. The other comprehensive gain of $1.5 million in the current period resulted primarily from $1.3 million of gains on derivative instruments outstanding at the end of the period designated as cash flow hedges.

For the nine months ended September 30, 2021, the total comprehensive income of $49.8 million included net earnings of $45.3 million and an other comprehensive gain of $4.5 million. The other comprehensive gain of $4.5 million in the current year resulted primarily from $3.9 million of gains on derivative instruments outstanding at the end of the period designated as cash flow hedges.

Acquisition of Tundra
On January 22, 2021, the Corporation acquired all of the issued and outstanding shares of Calgary, Alberta-based Tundra for an aggregate purchase price of $99.4 million composed of cash consideration of $74.1 million and the issuance of 1,357,142 Wajax common shares with a fair value of $25.3 million. Founded in 1999, Tundra provides maintenance and technical services to customers in the western Canadian midstream oil and gas, oil sands, petrochemical, mining, forestry and municipal sectors. Tundra also distributes a diverse range of industrial process equipment, representing industry-leading manufacturers of valves and actuators, instrumentation and controls, motors and drives, control buildings, boilers and water treatment solutions. Employing approximately 150 people at the time of acquisition, Tundra operates four facilities in Alberta and maintains a sales presence in western Canada. Tundra added revenues of $93.5 million and net earnings of $4.4 million during the nine months ended September 30, 2021, excluding $1.8 million of pre-tax amortization expense relating to intangible assets recognized for the Tundra acquisition. Consistent with Wajax's strategy, the acquisition of Tundra is expected to provide meaningful growth in the Corporation's ERS and industrial parts categories. Tundra's operations are complementary to Wajax's existing ERS and industrial parts businesses, adding extensively to its service offering and product portfolio, and further enhancing the "One Wajax" value proposition as macro tailwinds support the potential for a return to pre-COVID-19 activity levels. The acquisition is expected to be immediately accretive to Wajax shareholders in an anticipated range of $0.10 - $0.15 (net of acquisition-related interest costs and amortization on expected intangible assets) for the 2021 financial year, on an earnings per share basis.

Notes:

(1)

The Corporation's backlog as at September 30, 2021 now includes customer purchase commitments for Delom, NorthPoint and Tundra, and therefore for comparability purposes customer purchase commitments for Delom and NorthPoint have been added to backlog as at September 30, 2020.

Selected Quarterly Information

The following table summarizes unaudited quarterly consolidated financial data for the eight most recently completed quarters.


2021

2020

2019


Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Revenue

$

401.3

$

446.1

$

387.1

$

381.0

$

340.6

$

356.9

$

344.1

$

403.9

Net earnings

$

14.7

$

18.1

$

12.5

$

10.7

$

6.7

$

10.2

$

4.1

$

12.2

Earnings per share









- Basic

$

0.68

$

0.85

$

0.59

$

0.53

$

0.33

$

0.51

$

0.20

$

0.61

- Diluted

$

0.66

$

0.82

$

0.58

$

0.52

$

0.33

$

0.50

$

0.20

$

0.60

Adjusted net earnings(1)

$

15.5

$

16.6

$

12.4

$

9.6

$

10.1

$

9.6

$

5.8

$

10.1

Adjusted earnings per share(1)









- Basic

$

0.72

$

0.77

$

0.59

$

0.48

$

0.50

$

0.48

$

0.29

$

0.51

- Diluted

$

0.70

$

0.75

$

0.57

$

0.47

$

0.49

$

0.47

$

0.28

$

0.50

Dividends declared per share

$

0.25

$

0.25

$

0.25

$

0.25

$

0.25

$

0.25

$

0.25

$

0.25

Weighted average common shares
outstanding - basic (in thousands)

21,409

21,409

21,080

20,034

20,034

20,034

20,016

20,009

(1)   These measures do not have a standardized meaning prescribed by GAAP. See the Non-GAAP and Additional GAAP Measures section.

Although quarterly fluctuations in revenue and net earnings are difficult to predict, during times of weak resource sector activity, the first quarter will tend to have seasonally lower revenues. However, the project timing of large mining trucks and shovels and power generation packages can shift the revenue and net earnings throughout the year. In addition, the sale of large construction units can also impact revenue due to the seasonality in that industry. Starting in 2020, revenues and net earnings have also been impacted by COVID-19, with the impact being felt more significantly in 2020 as compared to year-to-date 2021.

Effective January 13, 2020, the Corporation acquired NorthPoint, and effective January 22, 2021, the Corporation acquired Tundra. The results of operations and financial position of these acquired businesses have been included in the figures since the dates of acquisition. The acquisition of NorthPoint facilitated year-over-year growth in the Corporation's ERS revenue when comparing 2020 to 2019, which contributed to weathering the conditions of the COVID-19 pandemic in 2020, adding $36.9 million in incremental revenue and $2.1 million in incremental net earnings in 2020. The acquisition of Tundra facilitated year-over-year growth in the Corporation's ERS and industrial parts revenue when comparing 2021 to 2020, adding $93.5 million in incremental revenue and $4.4 million in incremental net earnings year to date, excluding $1.8 million of pre-tax amortization expense relating to intangible assets recognized for the Tundra acquisition.

A discussion of Wajax's previous quarterly results can be found in Wajax's quarterly MD&A available on SEDAR at www.sedar.com.

Consolidated Financial Condition

Capital Structure and Key Financial Condition Measures


September 30
2021

June 30
2021

December 31
2020

Shareholders' equity

$

386.1

$

374.6

$

325.6

Funded net debt(1)

166.9

197.4

219.6

Total capital

$

553.0

$

572.1

$

545.2

Funded net debt to total capital(1)


30.2 %


34.5 %


40.3 %

Leverage ratio(1)

1.39

1.73

2.28

Senior secured leverage ratio(1)

0.95

1.28

1.73

(1)  See the Non-GAAP and Additional GAAP Measures section.

The Corporation's objective is to manage its working capital and normal-course capital investment programs within a leverage range of 1.5 to 2.0 times and to fund those programs through operating cash flow and its bank credit facilities as required. There may be instances whereby the Corporation is willing to maintain a leverage ratio outside of this range during changes in economic cycles. The Corporation may also maintain a leverage ratio above the stated range as a result of investments in acquisitions and may fund those acquisitions using its bank credit facilities and other debt instruments in accordance with the Corporation's expectations of total future cash flows, financing costs and other factors. The Corporation's leverage ratio is currently below the target range, due to strength in the trailing 12-month pro-forma adjusted EBITDA, combined with a reduction in debt levels on account of significant cash generated from operating activities. See the Funded Net Debt section.

Shareholders' Equity

The Corporation's shareholders' equity at September 30, 2021 of $386.1 million increased $11.4 million from June 30, 2021, due primarily to total comprehensive income of $16.2 million exceeding dividends declared of $5.4 million. For the nine months ended September 30, 2021, the Corporation's shareholders' equity increased $60.4 million due primarily to total comprehensive income of $49.8 million and shares issued to acquire Tundra of $25.3 million, offset partially by dividends declared of $16.1 million.

The Corporation's share capital included in shareholders' equity on the condensed consolidated interim statements of financial position, consists of:


Number of
Common Shares

Amount

Issued and outstanding, December 31, 2020

20,167,703

$

182.5

Common shares issued for acquisition of business

1,357,142

25.3

Common shares issued to settle share-based compensation plans

6,583

0.1

Issued and outstanding, September 30, 2021

21,531,428

$

207.8

Shares held in trust, December 31, 2020

(134,084)

(1.2)

Released for settlement of certain share-based compensation plans

11,979

0.1

Shares held in trust, September 30, 2021

(122,105)

$

(1.1)

Issued and outstanding, net of shares held in trust, September 30, 2021

21,409,323

$

206.7

At the date of this MD&A, the Corporation had 21,409,323 common shares issued and outstanding, net of shares held in trust.

At September 30, 2021, Wajax had four share-based compensation plans; the Wajax Share Ownership Plan (the "SOP"), the Directors' Deferred Share Unit Plan (the "DDSUP"), the Mid-Term Incentive Plan for Senior Executives (the "MTIP") (with MTIP awards being composed of performance share units ("PSUs") and restricted share units ("RSUs")) and the Deferred Share Unit Plan (the "DSUP").

As of September 30, 2021, there were 516,799 SOP and DDSUP (treasury share rights plans) rights outstanding of which 486,931 rights were vested, 297,757 MTIP PSUs and equity-settled DSUP (market-purchased share rights plans) rights outstanding of which 25,811 rights were vested, and 508,249 MTIP RSUs and cash-settled DSUP (cash-settled rights plans) rights outstanding of which 10,574 rights were vested. Depending on the actual level of achievement of the performance targets associated with the outstanding MTIP PSUs, the number of market-purchased shares required to satisfy the Corporation's obligations could be higher or lower.

Wajax recorded compensation expense of $1.6 million for the quarter (2020 - expense of $1.5 million) and compensation expense of $5.6 million for the nine months ended September 30, 2021 (2020 - expense of $2.7 million) in respect of these plans.

Funded Net Debt (See the Non-GAAP and Additional GAAP Measures section)


September 30
2021

June 30
2021

December 31
2020

Cash

$

(6.9)

$

(6.2)

$

(6.6)

Debentures

55.1

54.9

54.6

Long-term debt

118.7

148.7

171.6

Funded net debt

$

166.9

$

197.4

$

219.6

Funded net debt of $166.9 million at September 30, 2021 decreased $30.6 million compared to $197.4 million at June 30, 2021. The decrease during the quarter was due primarily to cash generated from operating activities of $40.2 million and proceeds on disposal of property, plant and equipment of $6.2 million, offset partially by the payment of lease liabilities of $7.0 million and dividends paid of $5.4 million.

Funded net debt of $166.9 million at September 30, 2021 decreased $52.7 million compared to $219.6 million at December 31, 2020. The decrease during the year to date was due primarily to cash generated from operating activities of $154.1 million and proceeds on disposal of property, plant and equipment of $15.4 million, offset partially by the $75.3 million in cash paid as consideration for business acquisitions, the payment of lease liabilities of $21.1 million and dividends paid of $15.7 million.

The Corporation's ratio of funded net debt to total capital decreased to 30.2% at September 30, 2021 from 34.5% at June 30, 2021, due to both the lower funded net debt level in the current period and the higher shareholders' equity level in the current period.

The Corporation's leverage ratio of 1.39 times at September 30, 2021 decreased from the June 30, 2021 ratio of 1.73 times due primarily to the lower debt level in the current period. See the Non-GAAP and Additional GAAP Measures section.

See the Liquidity and Capital Resources section.

Financial Instruments

Wajax uses derivative financial instruments in the management of its foreign currency, interest rate and share-based compensation exposures. Wajax policy restricts the use of derivative financial instruments for trading or speculative purposes. 

Wajax monitors the proportion of variable rate debt to its total debt portfolio and may enter into interest rate hedge contracts to mitigate a portion of the interest rate risk on its variable rate debt. A change in interest rates, in particular related to the Corporation's unhedged variable rate debt, is not expected to have a material impact on the Corporation's results of operations or financial condition over the long term.

Wajax has entered into interest rate hedge contracts to minimize exposure to interest rate fluctuations on its variable rate debt. All interest rate hedge contracts are recorded in the unaudited condensed consolidated interim financial statements at fair value. As at September 30, 2021, Wajax had the following interest rate hedge contracts outstanding:

  • $150.0 million, expiring in November 2024, with a weighted average interest rate of 2.12% (December 31, 2020 - $150.0 million, expiring in November 2024, with a weighted average interest rate of 2.12%)

Wajax enters into foreign exchange forward contracts to hedge the exchange risk associated with the cost of certain inbound inventory and foreign currency-denominated sales to customers along with the associated receivables as part of its normal course of business. As at September 30, 2021, Wajax had the following contracts outstanding:

  • to buy U.S. $98.4 million (December 31, 2020 – to buy U.S. $45.9 million),
  • to buy Euro €0.5 million (December 31, 2020 - to buy Euro €0.1 million),
  • to sell U.S. $34.1 million (December 31, 2020 – to sell U.S. $32.2 million), and
  • to sell Euro €1.0 million (December 31, 2020 – to sell €0.9 million).

The U.S. dollar contracts expire between October 2021 and January 2024, with an average U.S./Canadian dollar rate of 1.2487.

The Euro contracts expire between October 2021 and December 2022, with an average Euro/Canadian dollar rate of 1.5066.

Wajax has entered into total return swap contracts to hedge the exposure to share price market risk on a class of MTIP rights that are cash-settled. All total return swap contracts are recorded in the unaudited condensed consolidated interim financial statements at fair value. As at September 30, 2021, Wajax had the following total return swap contracts outstanding:

  • contracts totaling 390,000 shares at an initial share value of $6.6 million (December 31, 2020 - contracts totaling 387,000 shares at an initial share value of $7.2 million)

The total return swap contracts expire between March 2022 and March 2024.

Contractual Obligations

There have been no material changes to the Corporation's contractual obligations since December 31, 2020, except the following:

Employee Pension Plan Wind-Up Settlement
The Corporation sponsored three pension plans: the Wajax Limited Pension Plan (the "Employees' Plan") which, except for a small group of employees in a defined benefit plan, is a defined contribution plan, and two defined benefit plans: the Pension Plan for Executive Employees of Wajax Limited (the "Executive Plan") and the Wajax Limited Supplemental Executive Retirement Plan (the "SERP"). Effective December 31, 2019, the Employees' Plan was wound up, which was comprised of both defined benefit and defined contribution components. Benefit accruals under the plan were frozen effective as of such date and all active members joined a new defined contribution plan sponsored by the Corporation, the Wajax Limited Defined Contribution Pension Plan.

During the second quarter of 2021, the Corporation settled benefit obligations and plan assets as part of the wind-up of the Employees' Plan effective December 31, 2019. The settlement was completed by entering into an agreement with a third party insurance company to purchase an annuity for participants who selected that an annuity be purchased on their behalf, and by paying commuted values to participants who selected a lump sum payout. The cost of the annuity purchase totaled $4.4 million and was funded with existing plan assets. For those participants who selected a lump sum settlement, the total lump sum paid was $2.6 million, which was also paid from existing plan assets. As a result of the settlement, the Employees' Plan assets and benefit obligation declined by $7.0 million and $7.1 million, respectively, resulting in a gain on settlement of $0.1 million that the Corporation recorded in the condensed consolidated interim statements of earnings during the second quarter.

See the Liquidity and Capital Resources section.

Off Balance Sheet Financing

It is likely but not reasonably certain that existing leases will be renewed or replaced, resulting in lease commitments being sustained at current levels. In the alternative, Wajax may incur capital expenditures to acquire equivalent capacity.

The Corporation had $27.0 million (December 31, 2020$54.6 million) of consigned inventory on hand from a major supplier at September 30, 2021, net of deposits of $6.5 million (December 31, 2020$42.3 million). In the normal course of business, Wajax receives inventory on consignment from this supplier which is generally sold or rented to customers or purchased by Wajax. Under the terms of the consignment program, Wajax is required to make periodic deposits to the supplier on the consigned inventory that is rented to Wajax customers or on-hand for greater than nine months. This consigned inventory is not included in Wajax's inventory as the supplier retains title to the goods.

Although management currently believes Wajax has adequate debt capacity, Wajax would have to access the equity or debt capital markets, or reduce dividends to accommodate any shortfalls in Wajax's credit facility. See the Liquidity and Capital Resources section.

Liquidity and Capital Resources
The Corporation's liquidity is maintained through various sources, including bank and non-bank credit facilities, debentures and cash generated from operations.

Bank and Non-bank Credit Facilities and Debentures

Wajax has a $450.0 million bank credit facility, of which $400.0 million matures October 1, 2024 and is composed of a non-revolving term facility and a revolving term facility, and $50.0 million matures December 30, 2022 and represents a non-revolving acquisition term facility. On October 1, 2021, the Corporation amended its bank credit facility to extend the maturity date for the $400.0 million non-revolving and revolving term facilities from October 1, 2024 to October 1, 2026, and to reduce the pricing of the $50.0 million non-revolving acquisition term facility to be in line with the non-revolving and revolving term facilities. On January 22, 2021, the Corporation utilized the $50.0 million non-revolving acquisition term facility to finance the acquisition of Tundra. The remaining cash portion of the purchase price was financed with the revolving term facility.

At September 30, 2021, Wajax had borrowed $120.1 million and issued $7.3 million of letters of credit for a total utilization of $127.4 million of its $450.0 million bank credit facility. Borrowing capacity under the bank credit facility is dependent on the level of inventories on-hand and outstanding trade accounts receivables. At September 30, 2021, borrowing capacity under the bank credit facility was equal to $450.0 million, of which $322.6 million was accessible to the Corporation.

The bank credit facility contains customary restrictive covenants, including limitations on the payment of cash dividends and an interest coverage maintenance ratio, all of which were met as at September 30, 2021. In particular, the Corporation is restricted from declaring dividends in the event the Corporation's senior secured leverage ratio, as defined in the bank credit facility agreement, exceeds 4.0 times. At September 30, 2021, the Corporation's senior secured leverage ratio was 0.95 times.

Borrowings under the bank credit facility bear floating rates of interest at margins over Canadian dollar bankers' acceptance yields, U.S. dollar LIBOR rates or prime. Margins on the facility depend on the Corporation's leverage ratio at the time of borrowing and range between 1.5% and 3.0% for Canadian dollar bankers' acceptances and U.S. dollar LIBOR borrowings, and 0.5% and 2.0% for prime rate borrowings under the non-revolving and revolving term facilities. Margins on the non-revolving acquisition term facility range between 1.7% and 3.3% for Canadian dollar bankers' acceptances and U.S. dollar LIBOR borrowings, and 0.7% and 2.3% for prime rate borrowings.

In addition, Wajax had $57.0 million of senior unsecured debentures outstanding at September 30, 2021, bearing interest at a rate of 6.00% per annum, payable semi-annually and maturing on January 15, 2025. The debentures will not be redeemable before January 15, 2023 (the "First Call Date"), except upon the occurrence of a change of control of the Corporation in accordance with the terms of the indenture governing the debentures (the "Indenture"). On and after the First Call Date and prior to January 15, 2024, the debentures will be redeemable in whole or in part from time to time at the Corporation's option at a redemption price equal to 103.0% of the principal amount of the debentures redeemed plus accrued and unpaid interest, if any, up to but excluding the date set for redemption. On and after January 15, 2024 and prior to the maturity date, the debentures will be redeemable, in whole or in part, from time to time at the Corporation's option at par plus accrued and unpaid interest, if any, up to but excluding the date set for redemption. The Corporation shall provide not more than 60 nor less than 30 days' prior notice of redemption of the debentures.

The Corporation will have the option to satisfy its obligation to repay the principal amount of the debentures due at redemption or maturity by issuing and delivering that number of freely tradable common shares determined in accordance with the terms of the Indenture. The debentures will not be convertible into common shares at the option of the holders at any time.

Under the terms of the bank credit facility, Wajax is permitted to have additional interest bearing debt of $25.0 million. As such, Wajax has up to $25.0 million of demand inventory equipment financing capacity with two non-bank lenders. At September 30, 2021, Wajax had no utilization of the interest bearing equipment financing facilities.

In addition, the Corporation has an agreement with a financial institution to sell 100% of selected accounts receivable on a recurring, non-recourse basis. Under this facility, up to $20.0 million of accounts receivable is permitted to be sold to the financial institution and can remain outstanding at any point in time. After the sale, Wajax does not retain any interests in the accounts receivable, but continues to service and collect the outstanding accounts receivable on behalf of the financial institution. At September 30, 2021, the Corporation continues to service and collect $12.7 million in accounts receivable on behalf of the financial institution.

As at September 30, 2021, $322.6 million was accessible under the bank facility and $25.0 million was unutilized under the non-bank facilities. As of November 1, 2021, Wajax continues to maintain its $450.0 million bank credit facility and an additional $25.0 million in credit facilities with non-bank lenders. Wajax maintains sufficient liquidity to meet short-term normal course working capital and maintenance capital requirements and certain strategic investments. However, Wajax may be required to access the equity or debt capital markets to fund significant acquisitions.

The Corporation's tolerance to interest rate risk decreases/increases as the Corporation's leverage ratio increases/decreases. At September 30, 2021, 100.0% of the Corporation's funded net debt was at a fixed interest rate which is within the Corporation's interest rate risk policy.

Cash Flow

The following table highlights the major components of cash flow as reflected in the Condensed Consolidated Interim Statements of Cash Flows:


Three months ended
September 30

Nine months ended
September 30

2021

2020

$ Change

2021

2020

$ Change

Net earnings

$

14.7

$

6.7

$

8.0

$

45.3

$

20.9

$

24.3

Items not affecting cash flow

27.0

19.2

7.8

73.6

65.3

8.3

Net change in non-cash operating working capital

9.5

17.0

(7.5)

69.4

5.6

63.8

Finance costs paid on debts

(3.3)

(4.3)

1.1

(9.2)

(9.4)

0.2

Finance costs paid on lease liabilities

(1.9)

(1.9)

(5.9)

(6.2)

0.4

Interest collected on lease receivables

0.1

0.1

0.2

0.1

0.1

Income taxes paid

(4.0)

(0.9)

(3.0)

(13.8)

(4.6)

(9.2)

Rental equipment additions

(3.1)

(3.6)

0.4

(7.9)

(14.8)

7.0

Rental equipment disposals

1.2

2.7

(1.5)

4.7

15.5

(10.8)

Other non-current liabilities

(1.8)

(0.2)

(1.6)

Cash paid on settlement of total return swaps

(0.6)

(1.4)

0.8

Cash generated from operating activities

$

40.2

$

34.8

$

5.4

$

154.1

$

70.7

$

83.4

Cash generated from (used in) investing activities

$

3.0

$

4.7

$

(1.7)

$

(63.5)

$

(16.2)

$

(47.3)

Cash used in financing activities

$

(42.5)

$

(29.7)

$

(12.8)

$

(90.4)

$

(59.4)

$

(31.0)

Operating Activities
Cash flows generated from operating activities amounted to $40.2 million in the third quarter of 2021, compared to cash flows generated from operating activities of $34.8 million in the same quarter of the previous year. The increase in cash generated from operating activities of $5.4 million was mainly attributable to an increase in net earnings excluding items not affecting cash flow of $15.8 million, offset partially by a decrease in cash generated from changes in non-cash operating working capital of $7.5 million and an increase in income taxes paid of $3.0 million.

Rental equipment additions in the third quarter of 2021 of $3.1 million (2020 – $3.6 million) related primarily to material handling lift trucks.

For the nine months ended September 30, 2021, cash flows generated from operating activities amounted to $154.1 million, compared to cash flows generated from operating activities of $70.7 million for the previous year. The increase in cash generated from operating activities of $83.4 million was mainly attributable to an increase in cash generated from changes in non-cash operating working capital of $63.8 million, an increase in net earnings excluding items not affecting cash flow of $32.7 million, and a decrease in rental equipment additions of $7.0 million, offset partially by a decrease in rental equipment disposals of $10.8 million, and an increase in income taxes paid of $9.2 million. The increase in cash generated from changes in non-cash operating working capital of $63.8 million was driven primarily by an increase in cash generated from changes in accounts payable and accrued liabilities of $90.4 million and an increase in cash generated from changes in deposits on inventory of $41.2 million, offset partially by a decrease in cash generated from changes in trade and other receivables of $25.9 million, a decrease in cash generated from changes in contract assets of $17.7 million and a decrease in cash generated from changes in inventories of $21.9 million.

For the nine months ended September 30, 2021, rental equipment additions of $7.9 million (2020 – $14.8 million) related primarily to material handling lift trucks.

Changes in significant components of non-cash operating working capital include the following:

Changes in Non-cash Operating Working Capital(1)

Three months ended
September 30

Nine months ended
September 30


2021

2020

2021

2020

Trade and other receivables

$

(11.1)

$

(0.1)

$

10.4

$

36.2

Contract assets

(5.6)

(3.0)

(15.2)

2.5

Inventory

5.6

29.6

4.3

26.2

Deposits on inventory

2.6

(2.0)

32.8

(8.5)

Prepaid expenses

(1.1)

(0.4)

(2.7)

(0.7)

Accounts payable and accrued liabilities

18.0

(13.6)

36.7

(53.8)

Provisions

(0.7)

6.3

(1.9)

5.7

Contract liabilities

1.7

0.1

5.2

(2.0)

Total Changes in Non-cash Operating Working Capital

$

9.5

$

17.0

$

69.4

$

5.6

(1)   Increase (decrease) in cash flow.

Significant components of the changes in non-cash operating working capital for the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 are as follows:

  • Trade and other receivables increased $11.1 million in the third quarter of 2021, compared to an increase of $0.1 million in the same period of 2020. The increase in the third quarter of 2021 resulted primarily from higher sales activity in the quarter compared to the previous quarter.

  • Inventory decreased $5.6 million in the third quarter of 2021 compared to a decrease of $29.6 million in the same period of 2020. The decrease in 2020 was due primarily to lower equipment inventory in the construction, power generation and mining categories.

  • Accounts payable and accrued liabilities increased $18.0 million in the third quarter of 2021 compared to a decrease of $13.6 million in the same period of 2020. The increase in the third quarter of 2021 resulted primarily from higher trade payables and higher payroll, bonuses and incentives accruals, offset partially by lower accrued liabilities. The decrease in 2020 resulted primarily from reduced inventory purchasing activity as the Corporation managed its working capital.

Significant components of the changes in non-cash operating working capital for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 are as follows:

  • Trade and other receivables decreased $10.4 million in 2021 when excluding the trade and other receivables acquired through business acquisitions of $17.5 million, compared to a decrease of $36.2 million in 2020. The decrease in 2021 resulted primarily from strong overall collections, including the collection of a prior year receivable balance for a large mining shovel. The decrease in 2020 resulted primarily from lower sales activity.

  • Contract assets increased $15.2 million in 2021 when excluding the contract assets acquired through business acquisitions of $8.0 million, compared to a decrease of $2.5 million in 2020. The increase in 2021 resulted from more work completed but not yet billed on customer contracts.

  • Inventory decreased $4.3 million in 2021 when excluding the inventory acquired through business combinations of $18.1 million, compared to a decrease of $26.2 million in the same period of 2020. The decrease in 2020 was due primarily to lower equipment and parts inventory as the Corporation managed its inventory levels.

  • Deposits on inventory decreased $32.8 million in 2021 compared to an increase of $8.5 million in 2020. The decrease in 2021 resulted from the sale of older consignment inventory for which the Corporation had made deposits.

  • Accounts payable and accrued liabilities increased $36.7 million in 2021 when excluding the accounts payable and accrued liabilities acquired through business acquisitions of $20.2 million, compared to a decrease of $53.8 million in 2020. The increase in 2021 resulted primarily from higher trade payables on increased inventory purchasing, and higher payroll, bonuses and incentives accruals. The decrease in 2020 resulted primarily from reduced inventory purchasing activity as the Corporation managed its working capital.

Investing Activities
The Corporation generated $3.0 million of cash from investing activities in the third quarter of 2021 compared to cash generated from investing activities of $4.7 million in the same quarter of 2020. During the third quarter of 2021, Wajax invested $2.0 million in property, plant and equipment additions, compared to $1.6 million in the same period of 2020. Proceeds on disposal of property, plant and equipment, consisting primarily of proceeds on disposal of properties, amounted to $6.2 million in the third quarter of 2021, compared to $6.3 million in the same period of 2020. The Corporation invested $1.7 million towards business acquisitions in the third quarter of 2021, compared to nil in the same period of 2020.

For the nine months ended September 30, 2021, the Corporation used $63.5 million of cash in investing activities compared to cash used in investing activities of $16.2 million in the same period of 2020. For the nine months ended September 30, 2021, Wajax invested $4.3 million in property, plant and equipment additions, compared to $4.1 million in the same period of 2020. Proceeds on disposal of property, plant and equipment, consisting primarily of proceeds on disposal of properties, amounted to $15.4 million for the year to date, compared to $6.7 million for the same period of 2020. For the nine months ended September 30, 2021, Wajax invested $75.3 million towards business acquisitions, compared to $17.9 million towards business acquisitions, in the same period of 2020.

Financing Activities
The Corporation used $42.5 million of cash in financing activities in the third quarter of 2021 compared to cash used in financing activities of $29.7 million in the same quarter of 2020. Financing activities in the quarter included a net bank credit facility repayment of $30.1 million (2020 – net repayment of $18.6 million), payment of lease liabilities of $7.0 million (2020 – $6.1 million) and dividends paid to shareholders of $5.4 million (2020 – $5.0 million).

For the nine months ended September 30, 2021, the Corporation used $90.4 million of cash in financing activities compared to using $59.4 million in the same period of 2020. Financing activities for the nine months ended September 30, 2021 included a net bank credit facility repayment of $52.9 million (2020 – net repayment of $27.2 million), the payment of lease liabilities of $21.1 million (2020 – $16.7 million) and dividends paid to shareholders of $15.7 million (2020 – $15.0 million).

Dividends
Dividends to shareholders were declared and payable to shareholders of record as follows:

Record Date

Payment Date

Per Share

Amount

March 15, 2021

April 6, 2021

$

0.25

$

5.4

June 15, 2021

July 6, 2021

$

0.25

$

5.4

September 15, 2021

October 5, 2021

$

0.25

$

5.4

Nine months ended September 30, 2021


$

0.75

$

16.1

On November 1, 2021, the Corporation declared a dividend of $0.25 per share for the fourth quarter of 2021 payable on January 5, 2022 to shareholders of record on December 15, 2021.

Critical Accounting Estimates
The preparation of the unaudited condensed consolidated interim financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenue and expenses. Critical accounting estimates are those that require management to make assumptions about matters that are highly uncertain at the time the estimate or assumption is made. Critical accounting estimates are also those that could potentially have a material impact on the Corporation's financial results were a different estimate or assumption used.

Estimates and underlying assumptions are reviewed on an ongoing basis. These estimates and assumptions are subject to change at any time based on experience and new information. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

On March 11, 2020, the World Health Organization declared the novel coronavirus a global pandemic. With the majority of governments worldwide declaring a state of emergency in response to the COVID-19 pandemic, any estimate of the length and severity of these developments is therefore subject to significant uncertainty, and accordingly estimates of the extent to which the COVID-19 pandemic may materially and adversely affect the Corporation's operations, financial results and condition in future periods are also subject to significant uncertainty. Therefore, uncertainty about judgements, estimates and assumptions made by management during the preparation of the Corporation's unaudited condensed consolidated interim financial statements related to the potential impacts of the COVID-19 outbreak on revenue, expenses, assets, liabilities, and note disclosures could result in a material adjustment to the carrying value of the asset or liability affected.

The key assumptions concerning the future and other key sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next fiscal year are as follows:

Allowance for credit losses
The Corporation is exposed to credit risk with respect to its trade and other receivables, and COVID-19 has increased the measurement uncertainty with respect to the determination of the allowance for expected credit losses. However, this is partially mitigated by the Corporation's diversified customer base of over 32,000 customers, with no one customer accounting for more than 10% of the Corporation's annual consolidated sales, which covers many business sectors across Canada. In addition, the Corporation's customer base spans large public companies, small independent contractors, original equipment manufacturers and various levels of government. The Corporation follows a program of credit evaluations of customers and limits the amount of credit extended when deemed necessary. The Corporation maintains an allowance for possible credit losses, and any such losses to date have been within management's expectations. The allowance for credit losses is determined by estimating the lifetime expected credit losses, taking into account the Corporation's past experience of collecting payments as well as observable changes in and forecasts of future economic conditions that correlate with default on receivables. At the point when the Corporation is satisfied that no recovery of the amount owing is possible, the amount is considered not recoverable and the financial asset is written off. The $1.4 million allowance for credit losses at September 30, 2021 decreased $2.2 million from $3.6 million at December 31, 2020. As economic conditions change, there is risk that the Corporation could experience a greater number of defaults compared to prior periods which would result in an increased charge to earnings.

Inventory obsolescence
The value of the Corporation's new and used equipment and high value parts are evaluated by management throughout the year, on a unit-by-unit basis considering projected customer demand, future market conditions, and other considerations evaluated by management. When required, provisions are recorded to ensure that the book value of equipment and parts are valued at the lower of cost or estimated net realizable value. The Corporation performs an aging analysis to identify slow moving or obsolete lower value parts inventory and estimates appropriate obsolescence provisions related thereto. The Corporation takes advantage of supplier programs that allow for the return of eligible parts for credit within specified time periods. The inventory obsolescence impact on earnings for the three months ended September 30, 2021 was a recovery of $0.1 million (2020 – charge of $1.1 million) and for the nine months ended September 30, 2021 was a charge of $0.3 million (2020 - charge of $5.4 million). As economic conditions change, there is risk that the Corporation could have an increase in inventory obsolescence compared to prior periods which would result in an increased charge to earnings.

Goodwill and intangible assets
The value in use of goodwill and intangible assets has been estimated using the forecasts prepared by management for the next five years. The key assumptions for the estimate are those regarding revenue growth, EBITDA margin, discount rate and the level of working capital required to support the business. These estimates are based on past experience and management's expectations of future changes in the market and forecasted growth initiatives.

Unanticipated changes in management's assumptions or estimates could materially affect the determination of the fair value of the Corporation and therefore, could reduce or eliminate the excess of fair value over the carrying value of a Corporation and could potentially result in an impairment charge in the future.

The Corporation performs an annual impairment test of its goodwill and intangible assets unless there is an early indication that the assets may be impaired in which case the impairment tests would occur earlier. There was no early indication of impairment in the quarter ended September 30, 2021.

Lease term of contracts with renewal options 
The lease term is defined as the non-cancellable term of the lease, including any periods covered by a renewal option to extend the lease if it is reasonably certain that the renewal option will be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain that the termination option will not be exercised.

Judgement is used when evaluating whether the Corporation is reasonably certain that the lease renewal option will be exercised, including examining any factors that may provide an economic incentive for renewal. In the event of a significant event within the Corporation's control that could affect its ability to exercise the renewal option, the lease term will be reassessed.

Changes in Accounting Policies
During the period, the Corporation did not adopt any new accounting standards or amendments that had an impact on the Corporation's unaudited condensed consolidated interim financial statements.

Risk Management and Uncertainties
As with most businesses, the Corporation is subject to a number of marketplace and industry related risks and uncertainties which could have a material impact on operating results and the Corporation's ability to pay cash dividends to shareholders. The Corporation attempts to minimize many of these risks through diversification of core businesses and through the geographic diversity of its operations. In addition, the Corporation has adopted an annual enterprise risk management assessment which is prepared by senior management and overseen by the Board of Directors and committees of the Board of Directors. The enterprise risk management framework sets out principles and tools for identifying, evaluating, prioritizing and managing risk effectively and consistently across the Corporation. There are however, a number of risks that deserve particular comment which are discussed in detail in the MD&A for the year ended December 31, 2020 which can be found on SEDAR at www.sedar.com.

Disclosure Controls and Procedures and Internal Control over Financial Reporting
Wajax's management, under the supervision of its Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), is responsible for establishing and maintaining disclosure controls and procedures ("DC&P") and internal control over financial reporting ("ICFR").

As at September 30, 2021, Wajax's management, under the supervision of its CEO and CFO, had designed DC&P to provide reasonable assurance that information required to be disclosed by Wajax in annual filings, interim filings or other reports filed or submitted under applicable securities legislation is recorded, processed, summarized and reported within the time periods specified in such securities legislation. DC&P are designed to ensure that information required to be disclosed by Wajax in annual filings, interim filings or other reports filed or submitted under applicable securities legislation is accumulated and communicated to Wajax's management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

As at September 30, 2021, Wajax's management, under the supervision of its CEO and CFO, had designed ICFR to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. In completing the design, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its 2013 version of Internal Control – Integrated Framework. With regard to general controls over information technology, management also used the set of practices of Control Objectives for Information and related Technology created by the IT Governance Institute. The Corporation has excluded from its evaluation the ICFR of Tundra, which was acquired effective January 22, 2021, as discussed in Note 4 of the unaudited condensed consolidated interim financial statements and accompanying notes for the period ended September 30, 2021. The total revenue subject to Tundra's ICFR represented 7.6% of the Corporation's consolidated total revenue for the nine months ended September 30, 2021. The total assets subject to Tundra's ICFR represented 6.7% of the Corporation's consolidated total assets as at September 30, 2021.

There was no change in Wajax's ICFR that occurred during the three months ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, Wajax's ICFR.

Non-GAAP and Additional GAAP Measures
The MD&A contains certain non-GAAP and additional GAAP measures that do not have a standardized meaning prescribed by GAAP. Therefore, these financial measures may not be comparable to similar measures presented by other issuers. Investors are cautioned that these measures should not be construed as an alternative to net earnings or to cash flow from operating, investing, and financing activities determined in accordance with GAAP as indicators of the Corporation's performance. The Corporation's management believes that:

(i) 

these measures are commonly reported and widely used by investors and management;

(ii) 

the non-GAAP measures are commonly used as an indicator of a company's cash operating performance, profitability and ability to raise and service debt;

(iii) 

the additional GAAP measures are commonly used to assess a company's earnings performance excluding its capital and tax structures;

(iv) 

"Adjusted net earnings" and "Adjusted basic and diluted earnings per share" provide indications of the results by the Corporation's principal business activities prior to recognizing non-recurring costs (recoveries) and non-cash losses (gains) on mark to market of derivative instruments. These adjustments to net earnings and basic and diluted earnings per share allow the Corporation's management to consistently compare periods by removing infrequent charges incurred outside of the Corporation's principal business activities and the impact of fluctuations in interest rates and the Corporation's share price;

(v) 

"Adjusted EBITDA" provides an indication of the results by the Corporation's principal business activities prior to recognizing non-recurring costs (recoveries) and non-cash losses (gains) on mark to market of derivative instruments. These adjustments to EBITDA allow the Corporation's management to consistently compare periods by removing infrequent charges incurred outside of the Corporation's principal business activities and the impact of fluctuations in finance costs related to the Corporation's capital structure, tax rates, long-term assets and the Corporation's share price; and

(vi) 

"Pro-forma adjusted EBITDA" used in calculating the Leverage ratio and Senior secured leverage ratio provides an indication of the results by the Corporation's principal business activities adjusted for the EBITDA of business acquisitions made during the period as if they were made at the beginning of the trailing 12-month period pursuant to the terms of the bank credit facility and the deduction of payments of lease liabilities, and prior to recognizing non-recurring costs (recoveries) and non-cash losses (gains) on mark to market of derivative instruments.

Non-GAAP financial measures are identified and defined below:

Funded net debt

Funded net debt includes bank indebtedness, debentures and total long-term debt, net of cash. Funded net debt is relevant in calculating the Corporation's funded net debt to total capital, which is a non-GAAP measure commonly used as an indicator of a company's ability to raise and service debt.



Debt

Debt is funded net debt plus letters of credit. Debt is relevant in calculating the Corporation's leverage ratio, which is a non-GAAP measure commonly used as an indicator of a company's ability to raise and service debt.



Total capital

Total capital is shareholders' equity plus funded net debt.



EBITDA

Net earnings (loss) before finance costs, income tax expense, depreciation and amortization.

 



EBITDA margin

Defined as EBITDA divided by revenue, as presented in the condensed consolidated interim statements of earnings.

 



Adjusted net earnings (loss)

Net earnings (loss) before after-tax restructuring and other related costs (recoveries), (gain) loss recorded on the sale of properties, non-cash losses (gains) on mark to market of derivative instruments, Tundra transaction costs and NorthPoint transaction costs.



Adjusted basic and diluted earnings (loss) per share

Basic and diluted earnings (loss) per share before after-tax restructuring and other related costs (recoveries), (gain) loss recorded on the sale of properties, non-cash losses (gains) on mark to market of derivative instruments, Tundra transaction costs and NorthPoint transaction costs.



Adjusted EBITDA

EBITDA before restructuring and other related costs (recoveries), (gain) loss recorded on the sale of properties, non-cash losses (gains) on mark to market of derivative instruments, Tundra transaction costs and NorthPoint transaction costs.



Adjusted EBITDA margin

Defined as adjusted EBITDA divided by revenue, as presented in the condensed consolidated interim statements of earnings.



Pro-forma adjusted EBITDA

Defined as adjusted EBITDA adjusted for the EBITDA of business acquisitions made during the period as if they were made at the beginning of the trailing 12-month period pursuant to the terms of the bank credit facility and the deduction of payments of lease liabilities.



Leverage ratio

The leverage ratio is defined as debt at the end of a particular quarter divided by trailing 12-month pro-forma adjusted EBITDA. The Corporation's objective is to maintain this ratio between 1.5 times and 2.0 times.



Senior secured leverage ratio

The senior secured leverage ratio is defined as debt excluding debentures at the end of a particular quarter divided by trailing 12-month pro-forma adjusted EBITDA.



Funded net debt to total capital

Defined as funded net debt divided by total capital. Total capital is the funded net debt plus shareholder's equity.



Backlog

Backlog is a management measure which includes the total sales value of customer purchase commitments for future delivery or commissioning of equipment, parts and related services, including ERS projects. This differs from the remaining performance obligations as defined by IFRS 15 Revenue from Contracts with Customers.



Additional GAAP measures are identified and defined below:


Earnings (loss) before finance costs and income taxes (EBIT)

Earnings (loss) before finance costs and income taxes, as presented in the condensed consolidated interim statements of earnings.



EBIT margin

Defined as EBIT divided by revenue, as presented in the condensed consolidated interim statements of earnings.



Earnings (loss) before income taxes (EBT)

Earnings (loss) before income taxes, as presented in the condensed consolidated interim statements of earnings.



Working capital

Defined as current assets less current liabilities, as presented in the condensed consolidated interim statements of financial position.



Other working capital amounts

Defined as working capital less trade and other receivables and inventory plus accounts payable and accrued liabilities, as presented in the condensed consolidated interim statements of financial position.

Reconciliation of the Corporation's net earnings to adjusted net earnings and adjusted basic and diluted earnings per share is as follows:


Three months ended

Nine months ended


September 30

September 30


2021

2020

2021

2020

Net earnings

$

14.7

$

6.7

$

45.3

$

20.9

Restructuring and other related costs, after-tax

5.6

5.7

Gain recorded on the sale of properties, after-tax

(0.1)

(1.2)

(0.8)

(1.2)

Non-cash losses (gains) on mark to market of derivative instruments, after-tax

0.9

(1.0)

(0.2)

(0.2)

NorthPoint transaction costs, after-tax

0.2

Tundra transaction costs, after-tax

0.3

Adjusted net earnings

$

15.5

$

10.1

$

44.5

$

25.5

Adjusted basic earnings per share(1)(2)

$

0.72

$

0.50

$

2.09

$

1.27

Adjusted diluted earnings per share(1)(2)

$

0.70

$

0.49

$

2.03

$

1.24

(1)

For the three months ended September 30, 2021, the numbers of basic and diluted shares outstanding were 21,409,323 and 22,075,170, respectively (2020 - 20,033,619 and 20,513,331, respectively).

(2)

For the nine months ended September 30, 2021, the numbers of basic and diluted shares outstanding were 21,300,718 and 21,937,073, respectively (2020 - 20,027,910 and 20,459,861, respectively)

Reconciliation of the Corporation's net earnings to EBT, EBIT, EBITDA, Adjusted EBITDA and Pro-forma adjusted EBITDA is as follows:


Three months ended

Nine months ended

Twelve months ended


September 30
2021

September 30
2020

September 30
2021

September 30
2020

September 30
2021

June 30
2021

December 31
2020

Net earnings

$

14.7

$

6.7

$

45.3

$

20.9

$

56.0

$

48.0

$

31.7

Income tax expense

5.5

2.5

17.1

7.9

21.1

18.1

11.9

EBT

$

20.2

$

9.2

$

62.3

$

28.8

$

77.1

$

66.1

$

43.6

Finance costs

4.5

5.1

14.6

16.9

18.7

19.3

21.0

EBIT

$

24.7

$

14.3

$

77.0

$

45.7

$

95.8

$

85.4

$

64.6

Depreciation and amortization

14.8

13.2

41.1

38.9

54.6

53.0

52.4

EBITDA

$

39.5

$

27.5

$

118.0

$

84.6

$

150.4

$

138.4

$

117.0

Restructuring and other related costs(1)

7.7

7.8

7.7

7.8

Gain recorded on the sale of properties

(0.1)

(1.4)

(1.0)

(1.4)

(2.2)

(3.6)

(2.7)

Non-cash losses (gains) on mark to market of derivative instruments(2)

1.3

(1.4)

(0.3)

(0.2)

(1.5)

(4.2)

(1.4)

NorthPoint transaction costs(3)

0.2

0.2

Tundra transaction costs(4)

0.4

1.4

1.4

1.0

Adjusted EBITDA

$

40.7

$

32.4

$

117.2

$

91.0

$

148.1

$

139.8

$

122.0

Tundra acquisition pro-forma EBITDA(5)

4.0

8.1

Payment of lease liabilities(6)

(7.0)

(6.1)

(21.1)

(16.7)

(27.3)

(26.3)

(22.9)

Pro-forma adjusted EBITDA

$

33.7

$

26.3

$

96.1

$

74.3

$

124.9

$

121.6

$

99.0

(1)

For 2020, restructuring and other related costs consists primarily of costs relating to workforce reductions in response to the economic conditions created by COVID-19 and related sales volume impacts.

(2)

Non-cash (gains) losses on mark to market of non-hedged derivative instruments.

(3)

In 2020, the Corporation incurred transaction costs in order to acquire NorthPoint. These costs were primarily for advisory services.

(4)

In both 2021 and 2020, the Corporation incurred transaction costs relating to the Tundra acquisition. These costs were primarily for advisory services.

(5)

Pro-forma adjusted EBITDA for Tundra for pre-acquisition periods, to adjust for the EBITDA of business acquisitions made during the period as if they were made at the beginning of the trailing 12-month period pursuant to the terms of the bank credit facility.

(6)

Effective with the reporting period beginning on January 1, 2019 and the adoption of IFRS 16, the Corporation amended the definition of Funded net debt to exclude lease liabilities not considered part of debt. As a result, the corresponding lease costs must also be deducted from EBITDA for the purpose of calculating the leverage ratio.

Calculation of the Corporation's funded net debt, debt, leverage ratio and senior secured leverage ratio is as follows:


September 30
2021

June 30
2021

December 31
2020

Cash

$

(6.9)

$

(6.2)

$

(6.6)

Debentures

55.1

54.9

54.6

Long-term debt

118.7

148.7

171.6

Funded net debt

$

166.9

$

197.4

$

219.6

Letters of credit

7.3

12.8

6.4

Debt

$

174.2

$

210.2

$

226.0

Pro-forma adjusted EBITDA(1)

$

124.9

$

121.6

$

99.0

Leverage ratio(2)

1.39

1.73

2.28

Senior secured leverage ratio(3)

0.95

1.28

1.73

(1)

For the twelve months ended September 30, 2021, June 30, 2021 and December 31, 2020.

(2)

Calculation uses debt divided by the trailing four-quarter Pro-forma adjusted EBITDA. This leverage ratio is calculated for purposes of monitoring the Corporation's objective target leverage ratio of between 1.5 times and 2.0 times, and is different from the leverage ratio calculated under the Corporation's bank credit facility agreement.

(3)

Calculation uses debt excluding debentures divided by the trailing four-quarter Pro-forma adjusted EBITDA. While the calculation contains some differences from the leverage ratio calculated under the Corporation's bank credit facility agreement, the resulting leverage ratio under the bank credit facility agreement is not significantly different. See the Liquidity and Capital Resources section.

Cautionary Statement Regarding Forward-Looking Information
This MD&A contains certain forward-looking statements and forward-looking information, as defined in applicable securities laws (collectively, "forward-looking statements"). These forward-looking statements relate to future events or the Corporation's future performance. All statements other than statements of historical fact are forward-looking statements. Often, but not always, forward looking statements can be identified by the use of words such as "plans", "anticipates", "intends", "predicts", "expects", "is expected", "scheduled", "believes", "estimates", "projects" or "forecasts", or variations of, or the negatives of, such words and phrases or state that certain actions, events or results "may", "could", "would", "should", "might" or "will" be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors beyond the Corporation's ability to predict or control which may cause actual results, performance and achievements to differ materially from those anticipated or implied in such forward-looking statements. To the extent any forward-looking information in this MD&A constitutes future-oriented financial information or financial outlook within the meaning of applicable securities law, such information is being provided to demonstrate the potential of the Corporation and readers are cautioned that this information may not be appropriate for any other purpose. There can be no assurance that any forward-looking statement will materialize. Accordingly, readers should not place undue reliance on forward looking statements. The forward-looking statements in this MD&A are made as of the date of this MD&A, reflect management's current beliefs and are based on information currently available to management. Although management believes that the expectations represented in such forward-looking statements are reasonable, there is no assurance that such expectations will prove to be correct. Specifically, this MD&A includes forward looking statements regarding, among other things, the main elements of our One Wajax strategy, including our focus on executing clear plans in five important areas: investments in our team, investments in our customers, executing our organic growth strategy, our accretive acquisition strategy and investments in our infrastructure; our introduction of a more comprehensive sustainability program and the achievement of targets and goals related to employee health, safety and wellness, training and development, diversity and equal opportunity, sustainable products and services, environmental responsibility, governance and community; our expectation that revenue associated with the acquisition of Tundra will be a significant contributor to our total revenue growth in 2021; our continued intention to work closely with our major suppliers in relation to inventory availability and supply chain service levels; our expectation that current challenges with the availability of construction and forestry, material handling and power systems equipment inventory will persist into the fourth quarter; our plans to continue our focus on success in construction and forestry, mining, material handling and power systems, including improvements in product support volumes; our belief that we have excellent growth opportunities in the aforementioned heavy equipment categories and our intention to continue to work closely with our supplier partners to prudently grow market share and capture aftermarket sales; our expectation that our industrial parts and ERS categories will yield strong growth, including the contribution of Tundra, and that ERS continues to be one of Wajax's most significant opportunities, capable of growth at each point in the economic cycle; our plan to minimize the implementation risks associated with our new ERP system by conducting such implementation over a 24-month period; the planned expansion of our Canadian direct distribution relationship with Hitachi effective March 1, 2022, as well as the expected benefits of such expanded relationship, including enhanced access to product development, increased market responsiveness, improved reliability of equipment supply and increased market share; our intention to continue working with Hitachi on transition planning for our expanded direct distribution relationship, and our mutual continued expectation of significant long-term benefits from such relationship; the end of a consignment program relating to construction-class excavators received from HCM's joint venture partner, including our plans to purchase all consignment inventory on hand during the fourth quarter of 2021, our expectation that new credit terms from the manufacturer will apply effective March 1, 2022 and our expectation that our existing credit facilities will be sufficient to support normal course working capital requirements, including the effect of these changes; our expectation that Tundra will provide meaningful growth in our ERS and industrial parts categories and that the acquisition of Tundra will be immediately accretive to shareholders in an anticipated range of $0.10 - $0.15 (net of acquisition-related interest costs and amortization on expected intangible assets) for the 2021 financial year on an earnings per share basis; our objective of managing our working capital and normal course capital investment programs within a leverage range of 1.5 – 2.0 times, and to fund such programs through operating cash flow and our bank credit facilities as required; the potential that we may maintain a leverage ratio outside our target range due to changes in economic cycles and investments in acquisitions, and that we may fund acquisitions using bank credit facilities and other debt instruments; our expectation that the impact of changes in interest rates (in particular, related to unhedged variable rate debt) will not have a material impact on our results of operations or financial condition over the longer term; our current belief in the adequacy of our debt capacity and sufficiency of our debt facilities, and our intention and ability to access debt and equity markets or reduce dividends should additional capital be required, including the potential that we may access equity or debt markets to fund significant acquisitions; and our financing, working and maintenance capital requirements, as well as our capital structure and leverage ratio. These statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, our ability to successfully manage our business through the COVID-19 pandemic and actions taken by governments, public authorities, suppliers and customers in response to the novel coronavirus and its variants; the ability of HCM and its partner to dissolve their joint venture arrangements, including their ability to complete the steps necessary for such dissolution in a timely manner or at all, and to obtain any required approvals for, or consents to, such dissolution; the ability of Hitachi and Wajax to develop and execute successful sales, marketing and other plans related to their expanded direct distribution relationship; general business and economic conditions; the supply and demand for, and the level and volatility of prices for, oil, natural gas and other commodities; financial market conditions, including interest rates; our ability to execute our updated Strategic Plan, including our ability to develop our core capabilities, execute our organic growth priorities, complete and effectively integrate acquisitions, such as Tundra, and to successfully implement new information technology platforms, systems and software, such as our new ERP system; the future financial performance of the Corporation; our costs; market competition; our ability to attract and retain skilled staff; our ability to procure quality products and inventory; and our ongoing relations with suppliers, employees and customers. The foregoing list of assumptions is not exhaustive. Factors that may cause actual results to vary materially include, but are not limited to, the geographic spread and ultimate impact of the COVID-19 virus and its variants, and the duration of the coronavirus pandemic; the duration and severity of travel, business and other restrictions imposed by governments and public authorities in response to COVID-19, as well as other measures that may be taken by such authorities; actions taken by our suppliers customers in relation to the COVID-19 pandemic, including slowing, reducing or halting operations; the inability of HCM and its partner to dissolve their joint venture arrangements satisfactorily, including their inability to complete the steps necessary for such dissolution in a timely manner or at all, or the failure to obtain any required approvals for, or consents to, such dissolution on acceptable terms; the ability of Hitachi and Wajax to develop and execute successful sales, marketing and other plans related to their expanded direct distribution relationship; a continued or prolonged deterioration in general business and economic conditions (including as a result of the COVID-19 pandemic); volatility in the supply and demand for, and the level of prices for, oil, natural gas and other commodities; a continued or prolonged decrease in the price of oil or natural gas; fluctuations in financial market conditions, including interest rates; the level of demand for, and prices of, the products and services we offer; levels of customer confidence and spending; market acceptance of the products we offer; termination of distribution or original equipment manufacturer agreements; unanticipated operational difficulties (including failure of plant, equipment or processes to operate in accordance with specifications or expectations, cost escalation, our inability to reduce costs in response to slow-downs in market activity, unavailability of quality products or inventory, supply disruptions (including disruptions caused by the COVID-19 pandemic), job action and unanticipated events related to health, safety and environmental matters); our ability to attract and retain skilled staff and our ability to maintain our relationships with suppliers, employees and customers. The foregoing list of factors is not exhaustive. Further information concerning the risks and uncertainties associated with these forward-looking statements and the Corporation's business may be found in this MD&A under the heading "Risk Management and Uncertainties" and in our Annual Information Form for the year ended December 31, 2020 (the "AIF"), and in our annual MD&A for financial risks, each of which have been filed on SEDAR. The forward-looking statements contained in this MD&A are expressly qualified in their entirety by this cautionary statement. The Corporation does not undertake any obligation to publicly update such forward-looking statements to reflect new information, subsequent events or otherwise unless so required by applicable securities laws.

Readers are cautioned that the risks described in the AIF, and in our annual MD&A, are not the only risks that could impact the Corporation. We cannot accurately predict the full impact that COVID-19 will have on our business, results of operations, financial condition or the demand for our products and services due to the uncertainties related to the spread of the virus and its variants. Risks and uncertainties not currently known to the Corporation, or currently deemed to be immaterial, may have a material effect on the Corporation's business, financial condition or results of operations.

Additional information, including Wajax's Annual Report, are available on SEDAR at www.sedar.com.

W A J A X   C O R P O R A T IO N
C O N D E N S E D   C O N S O L I D A T E D   I N T E R I M   S T A T E M E N T S   O F
F I N A N C I A L   P O S I T I O N

As at

(unaudited, in thousands of Canadian dollars)

Note

September 30, 2021

December 31, 2020

ASSETS




CURRENT




Cash


$

6,880

$

6,625

Trade and other receivables

5

221,654

214,507

Contract assets

6

46,129

23,003

Inventory

7

371,253

357,421

Deposits on inventory

7

11,440

44,197

Lease receivables - current


3,098

2,039

Prepaid expenses


8,593

5,639

Derivative financial assets - current

16

2,964

1,597



672,011

655,028

NON-CURRENT




Rental equipment

8

48,390

56,901

Property, plant and equipment

8

40,535

41,371

Right-of-use assets

9

133,408

131,733

Lease receivables


6,611

5,120

Goodwill and intangible assets


170,665

90,726

Derivative financial assets

16

1,775

511



401,384

326,362

Total assets


$

1,073,395

$

981,390

LIABILITIES AND SHAREHOLDERS' EQUITY





CURRENT





Accounts payable and accrued liabilities

10

$

289,063

$

231,726

Provisions - current

11

4,807

6,744

Contract liabilities

6

12,515

7,064

Dividends payable

17

5,352

5,008

Income taxes payable


1,488

1,085

Lease liabilities - current

12

27,645

23,852

Derivative financial liabilities - current

16

740

3,387



341,610

278,866

NON-CURRENT




Provisions

11

216

216

Deferred tax liabilities


15,727

1,388

Employee benefits

13

8,887

9,223

Derivative financial liabilities

16

4,467

8,285

Other liabilities


2,893

2,365

Lease liabilities

12

139,765

129,181

Debentures

14

55,072

54,638

Long-term debt

15

118,684

171,580



345,711

376,876

Total liabilities


687,321

655,742

SHAREHOLDERS' EQUITY




Share capital

17

206,705

181,274

Contributed surplus


8,344

7,698

Retained earnings


172,969

143,271

Accumulated other comprehensive loss


(1,944)

(6,595)

Total shareholders' equity


386,074

325,648

Total liabilities and shareholders' equity


$

1,073,395

$

981,390

Subsequent events (Note 25)

See accompanying notes to unaudited condensed consolidated interim financial statements.

W A J A X   C O R P O R A T I O N
C O N D E N S E D   C O N S O L I D A T E D   I N T E R I M   S T A T E M E N T S   O F
E A R N I N G S



Three months ended
September 30

Nine months ended
September 30

(unaudited, in thousands of Canadian dollars, except
per share data)

Note

2021

2020

2021

2020







Revenue

19

$

401,305

$

340,620

$

1,234,504

$

1,041,629

Cost of sales


316,189

276,676

984,490

848,794

Gross profit


85,116

63,944

250,014

192,835

Selling and administrative expenses


60,427

41,934

173,044

139,290

Restructuring and other related costs


7,687

7,799

Earnings before finance costs and income taxes


24,689

14,323

76,970

45,746

Finance costs

20

4,524

5,138

14,627

16,907

Earnings before income taxes


20,165

9,185

62,343

28,839

Income tax expense

21

5,508

2,514

17,065

7,902

Net earnings


$

14,657

$

6,671

$

45,278

$

20,937







Basic earnings per share

17

$

0.68

$

0.33

$

2.13

$

1.05

Diluted earnings per share

17

0.66

0.33

2.06

1.02

W A J A X   C O R P O R A T I O N
C O N D E N S E D   C O N S O L I D A T E D   I N T E R I M   S T A T E M E N T S   O F
C O M P R E H E N S I V E   I N C O M E



Three months ended
September 30

Nine months ended
September 30

(unaudited, in thousands of Canadian dollars)

Note

2021

2020

2021

2020

Net earnings


$

14,657

$

6,671

$

45,278

$

20,937

Items that will not be reclassified to income












Actuarial losses on pension plans, net of tax recovery of $52 (2020 - nil)

13

(142)







Items that may be subsequently reclassified to earnings












Losses (gains) on derivative instruments designated as
cash flow hedges in prior periods reclassified to
net earnings during the period, net of tax recovery of
$100 (2020 - expense of $71) and year to date, net
of tax recovery of $278 (2020 - expense of $299)


271

(194)

755

(813)







Gains (losses) on derivative instruments outstanding
at the end of the period designated as cash flow
hedges, net of tax expense of $462 (2020 - recovery
of $40) and year to date, net of tax expense of
$1,434 (2020 - recovery of $1,545)


1,255

(110)

3,896

(4,200)







Other comprehensive income (loss), net of tax


1,526

(304)

4,509

(5,013)

Total comprehensive income


$

16,183

$

6,367

$

49,787

$

15,924


See accompanying notes to unaudited condensed consolidated interim financial statements.

W A J A X   C O R P O R A T I O N
C O N D E N S E D   C O N S O L I D A T E D   I N T E R I M   S T A T E M E N T S   O F
C H A N G E S   I N   S H A R E H O L D E R S '   E Q U I T Y






Accumulated
other
comprehensive
loss


For the nine months ended September 30, 2021

(unaudited, in thousands of Canadian dollars)

 

Note

Share

capital

Contributed
surplus

Retained
earnings

Cash flow
hedges

Total








December 31, 2020


$

181,274

$

7,698

$

143,271

$

(6,595)

$

325,648

Net earnings


45,278

45,278

Other comprehensive (loss) income


(142)

4,651

4,509

Total comprehensive income


45,136

4,651

49,787

Shares issued to settle share-based compensation plans

17

67

(67)

Shares released from trust to settle share-based compensation plans

17

108

(1,007)

618

(281)

Share-based compensation expense

18

1,720

1,720

Shares issued for acquisition of business

4

25,256

25,256

Dividends declared

17

(16,056)

(16,056)

September 30, 2021


$

206,705

$

8,344

$

172,969

$

(1,944)

$

386,074


See accompanying notes to unaudited condensed consolidated interim financial statements.

W A J A X   C O R P O R A T I O N
C O N D E N S E D   C O N S O L I D A T E D   I N T E R I M   S T A T E M E N T S   O F
C H A N G E S   I N   S H A R E H O L D E R S '   E Q U I T Y






Accumulated
other
comprehensive
loss


For the nine months ended September 30, 2020

(unaudited, in thousands of Canadian dollars)

 

Note

Share

capital

Contributed
surplus

Retained
earnings

Cash flow
hedges

Total








December 31, 2019


$

181,075

$

7,165

$

130,961

$

(2,386)

$

316,815

Net earnings


20,937

20,937

Other comprehensive loss


(5,013)

(5,013)

Total comprehensive income (loss)


20,937

(5,013)

15,924

Shares released from trust to settle share-based compensation plans

17

199

(1,264)

721

(344)

Share-based compensation expense

18

1,719

1,719

Dividends declared

17

(15,024)

(15,024)

September 30, 2020


$

181,274

$

7,620

$

137,595

$

(7,399)

$

319,090


See accompanying notes to unaudited condensed consolidated interim financial statements.

W A J A X   C O R P O R A T I O N
C O N D E N S E D   C O N S O L I D A T E D   I N T E R I M   S T A T E M E N T S   O F
C A S H   F L O W S



Three months ended
September 30

Nine months ended
September 30

(unaudited, in thousands of Canadian dollars)

Note

2021

2020

2021

2020

OPERATING ACTIVITIES






Net earnings


$

14,657

$

6,671

$

45,278

$

20,937

Items not affecting cash flow:






Depreciation and amortization:






Rental equipment

8

3,794

4,415

11,509

14,357

Property, plant and equipment

8

1,875

1,879

5,510

5,650

Right-of-use assets

9

6,451

6,483

20,087

17,559

Intangible assets


2,663

431

3,967

1,334

Gain on disposal of property, plant and equipment

8

(233)

(1,650)

(1,515)

(1,865)

Share-based compensation expense

18

1,576

1,527

5,575

2,702

Non-cash income from finance leases


(212)

156

(437)

(320)

Employee benefits expense, net of employer contributions


55

(106)

(756)

134

Loss (gain) on derivative financial instruments

16

1,025

(1,586)

(2,035)

899

Finance costs

20

4,524

5,138

14,627

16,907

Income tax expense

21

5,508

2,514

17,065

7,902



41,683

25,872

118,875

86,196

Changes in non-cash operating working capital

22

9,505

16,968

69,448

5,646

Rental equipment additions

8

(3,149)

(3,585)

(7,881)

(14,846)

Rental equipment disposals

8

1,232

2,729

4,736

15,502

Other non-current liabilities


(20)

(36)

(1,791)

(227)

Cash paid on settlement of total return swaps

16

(613)

(1,396)

Finance costs paid on debts


(3,274)

(4,333)

(9,217)

(9,423)

Finance costs paid on lease liabilities

12, 20

(1,857)

(1,906)

(5,863)

(6,213)

Interest collected on lease receivables


56

51

167

109

Income taxes paid


(3,966)

(927)

(13,760)

(4,599)

Cash generated from operating activities


40,210

34,833

154,101

70,749







INVESTING ACTIVITIES






Property, plant and equipment additions

8

(1,998)

(1,577)

(4,343)

(4,070)

Proceeds on disposal of property, plant and equipment


6,245

6,273

15,442

6,709

Intangible assets additions


(223)

(244)

(1,127)

(1,646)

Collection of lease receivables


703

293

1,816

727

Acquisition of business (net of cash acquired)

4

(1,716)

(75,256)

(17,931)

Cash generated from (used in) investing activities


3,011

4,745

(63,468)

(16,211)







FINANCING ACTIVITIES






Net decrease in bank debt

15

(30,129)

(18,596)

(52,924)

(27,232)

Transaction costs on debts

15

(393)

(37)

Payment of lease liabilities

12

(7,012)

(6,070)

(21,068)

(16,727)

Payment of tax withholding for share-based compensation


(281)

(345)

Dividends paid


(5,352)

(5,008)

(15,712)

(15,019)

Cash used in financing activities


(42,493)

(29,674)

(90,378)

(59,360)

Change in cash and bank indebtedness


728

9,904

255

(4,822)

Cash (bank indebtedness) - beginning of period


6,152

(11,546)

6,625

3,180

Cash (bank indebtedness) - end of period


$

6,880

$

(1,642)

$

6,880

$

(1,642)


See accompanying notes to unaudited condensed consolidated interim financial statements.

WAJAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED  INTERIM
FINANCIAL STATEMENTS

September 30, 2021
(unaudited, amounts in thousands of Canadian dollars, except share and per share data)

1.    COMPANY PROFILE

Wajax Corporation (the "Corporation") is incorporated in Canada. The address of the Corporation's registered head office is 2250 Argentia Road, Mississauga, Ontario, Canada. The Corporation operates an integrated distribution system, providing sales, parts and services to a broad range of customers in diversified sectors of the Canadian economy, including: construction, forestry, mining, industrial and commercial, oil sands, transportation, metal processing, government and utilities, and oil and gas.

2.    BASIS OF PREPARATION

Statement of compliance
These unaudited condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34, Interim Financial Reporting and do not include all of the disclosures required for annual consolidated financial statements. Accordingly, these unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2020. The significant accounting policies follow those disclosed in the most recently reported audited consolidated financial statements.

These unaudited condensed consolidated interim financial statements were authorized for issue by the Board of Directors on November 1, 2021.

3.    CHANGE IN ACCOUNTING POLICIES

During the period, the Corporation did not adopt any new accounting standards or amendments that had an impact on the Corporation's unaudited condensed consolidated interim financial statements.

4.    ACQUISITION OF BUSINESS

Tundra Process Solutions Ltd. ("Tundra")

On January 22, 2021, the Corporation acquired all of the issued and outstanding shares of Calgary, Alberta-based Tundra. Founded in 1999, Tundra provides maintenance and technical services to customers in the western Canadian midstream oil and gas, oil sands, petrochemical, mining, forestry and municipal sectors. Tundra also distributes a diverse range of industrial process equipment, representing industry-leading manufacturers of valves and actuators, instrumentation and controls, motors and drives, control buildings, boilers and water treatment solutions.

The acquisition was accounted for as a business combination using the acquisition method whereby the net assets acquired were recorded at fair value. Final valuations of certain items are not yet complete, due to the timing of the acquisition and the inherent complexity associated with valuations. Therefore, the purchase price allocation is preliminary and subject to adjustment on completion of the valuation process. During the quarter, amounts allocated to assets acquired and liabilities assumed were revised. The main revisions, resulting from changes in estimates, were to increase intangible assets by $42,000, decrease goodwill by $32,615 and to increase deferred tax liabilities by $9,536. Other tangible net assets increased by $151.

The following table summarizes the acquisition-date fair value of each major class of consideration transferred, the recognized amounts of the identifiable assets acquired and liabilities assumed, and the resulting value of goodwill:

Consideration transferred:



Cash consideration

$

74,137

Fair value of common share consideration


25,256


$

99,393

Fair value of assets and liabilities recognized:



Cash

$

597

Trade and other receivables


16,632

Contract assets


7,951

Inventory


17,738

Prepaid expenses


241

Property, plant and equipment


4,329

Right-of-use assets


6,138

Accounts payable and accrued liabilities


(20,196)

Contract liabilities


(220)

Lease liabilities


(6,076)

Deferred tax liabilities


(9,777)

Tangible net assets acquired

$

17,357

Intangible assets


42,000

Goodwill


40,036


$

99,393

Net cash outflow for the acquisition was $73,540, as $597 of cash was acquired as part of Tundra's net assets.

Trade and other receivables represents gross contractual amounts receivable of $16,809 less management's best estimate of the allowance for credit losses of $177.

The fair value of common shares transferred as consideration is based on the Corporation's quoted share price on the date of acquisition, which was $18.61 per share.

Goodwill arising from the acquisition is attributable mainly to the ability to leverage the assembled workforce, industry knowledge, future growth and the potential to realize synergies in the form of cost savings. The goodwill recorded on the acquisition of Tundra is not deductible for income tax purposes.

For the quarter, Tundra revenues of $38,542 and net earnings of $1,706 were included in the condensed consolidated interim statements of earnings. Tundra revenues of $93,504 and net earnings of $4,427 were included in the condensed consolidated interim statements of earnings from the date of acquisition to September 30, 2021. Had the acquisition of Tundra occurred on January 1, 2021, the consolidated revenue would have increased by $5,449 and the consolidated net earnings would have increased by $145 for the nine months ended September 30, 2021.

Tundra transaction costs, primarily for advisory services, were nil for the quarter and $405 for the nine months ended September 30, 2021 and were included in selling and administrative expenses in the condensed consolidated interim statements of earnings. Additionally, Tundra transaction costs of $1,041 were recognized during the fourth quarter of 2020 in selling and administrative expenses.

QT Valve & Supply Limited ("QT Valve")

On September 1, 2021, the Corporation acquired all of the issued and outstanding shares of Fort St. John, British Columbia-based QT Valve, a supplier of valves and valve services to the western oil and gas market. QT Valve was acquired for total consideration of $1,795, subject to post-closing adjustments. Tangible net assets acquired and goodwill recognized upon acquisition were $1,052 and $743, respectively. Final valuations of certain items are not yet complete, due to the timing of the acquisition and the inherent complexity associated with valuations. Therefore, the purchase price allocation is preliminary and subject to adjustment on completion of the valuation process.

5.    TRADE AND OTHER RECEIVABLES

The Corporation's trade and other receivables consist of trade accounts receivable from customers and other accounts receivable, generally from suppliers for warranty and rebates. Trade and other receivables are comprised of the following:


September 30, 2021

December 31, 2020

Trade accounts receivable

$

196,236

$

191,482

Less: allowance for credit losses


(1,420)


(3,626)

Net trade accounts receivable

$

194,816

$

187,856

Other receivables


26,838


26,651

Total trade and other receivables

$

221,654

$

214,507

6.    CONTRACT ASSETS AND LIABILITIES

The following table provides information about contract assets and contract liabilities from contracts with customers:


September 30, 2021

December 31, 2020

Contract assets

$

46,129

$

23,003

Contract liabilities


12,515


7,064

The contract assets primarily relate to the Corporation's rights to consideration for work completed but not billed at the reporting date on product support and engineered repair services ("ERS") revenue. The contract assets are transferred to receivables when billed upon completion of significant milestones. The contract liabilities primarily relate to the advance billing or advance consideration received from customers on equipment sales, industrial parts, and ERS revenue, for which revenue is recognized when control transfers to the customer.

7.    INVENTORY

The Corporation's inventory balance consists of the following:


September 30, 2021

December 31, 2020

Equipment

$

193,835

$

218,740

Parts


145,082


125,252

Work-in-process


32,336


13,429

Total inventory

$

371,253

$

357,421

All amounts shown are net of obsolescence provisions of $26,175 (December 31, 2020 - $28,144).

As at September 30, 2021, the Corporation has included $52,839 (December 31, 2020 - $41,815) in equipment inventory related to short-term rental contracts that are expected to convert to equipment sales within a six to twelve month period.

Substantially all of the Corporation's inventory is pledged as security for the bank credit facility.

Deposits on inventory in the condensed consolidated interim statements of financial position, amounting to $11,440 as at September 30, 2021 (December 31, 2020 - $44,197), represents deposits and other required periodic payments on equipment primarily held on consignment. These payments reduce the collateral value of the equipment and therefore the ultimate amount owing to the supplier upon eventual purchase. Upon sale of the equipment to a customer, the Corporation is required to purchase the equipment in full from the supplier.

8.    PROPERTY, PLANT AND EQUIPMENT & RENTAL EQUIPMENT

The Corporation's property, plant and equipment balance at September 30, 2021 is $40,535 (December 31, 2020 - $41,371). The Corporation acquired property, plant and equipment with a cost of $1,998 during the quarter (2020 - $1,577) and $4,343 year to date (2020 - $4,070), net of property, plant and equipment acquired through business acquisitions of $4,389 year to date (2020 - $3,409). Assets with a carrying amount of $1,368 during the quarter (2020 - $2,050) and $4,611 year to date (2020 - $2,271) were disposed of, resulting in a gain on disposal of $233 during the quarter (2020 - gain of $1,650) and a gain on disposal of $1,515 year to date (2020 - gain of $1,865). The disposals included the sale and leaseback transactions described in Note 9. The Corporation recognized depreciation of property, plant and equipment of $1,875 during the quarter (2020 - $1,879) and $5,510 year to date (2020 - $5,650).

The Corporation's rental equipment balance at September 30, 2021 is $48,390 (December 31, 2020 - $56,901). The Corporation acquired rental equipment with a cost of $3,149 during the quarter (2020 - $3,585) and $7,881 year to date (2020 - $14,846). Rental equipment with a carrying amount of $1,232 during the quarter (2020 - $2,729) and $4,736 year to date (2020 - $15,502) was disposed of. The Corporation recognized depreciation of rental equipment of $3,794 during the quarter (2020 - $4,415) and $11,509 year to date (2020 - $14,357).

9.    RIGHT-OF-USE ASSETS

The Corporation's right-of-use assets balance at September 30, 2021 is $133,408 (December 31, 2020 - $131,733). The Corporation recognized net right-of-use assets additions of $3,393 during the quarter (2020 - $13,014) and $16,030 year to date (2020 - $21,302). In addition, the Corporation acquired right-of-use assets through business acquisitions of $6,138 year to date (2020 -  $12,926).

The Corporation recognized depreciation of right-of-use assets during the quarter of $6,451 (2020 - $6,483) and $20,087 year to date (2020 - $17,559).

The Corporation entered into sale and leaseback transactions for two of its owned properties during the quarter (2020 - one of its owned properties) and three of its owned properties year to date (2020 - one of its owned properties). The proceeds net of transaction costs on the sale of the properties were $5,314 during the quarter (2020 - $5,238) and $13,819 year to date (2020 - $5,238), and the carrying amount was $603 during the quarter (2020 - $1,210) and $3,623 year to date (2020 - $1,210). The transactions resulted in a total gain on the sale of the properties of $4,711 during the quarter (2020 - $4,028) and $10,196 year to date (2020 - $4,028), of which $67 during the quarter (2020 - $1,455) and $880 year to date (2020 - $1,455) was recognized in the condensed consolidated interim statements of earnings at the time of the transaction; the remaining $4,644 during the quarter (2020 - $2,573) and $9,316 year to date (2020 - $2,573) was deferred as a reduction of the right-of-use assets. The Corporation also recorded lease liabilities of $5,269 during the quarter (2020 - $3,346) and $10,534 year to date (2020 - $3,346), and right-of-use assets of $625 during the quarter (2020 - $773) and $1,218 year to date (2020 - $773) related to these sale and leaseback transactions. The terms of the leases signed in the quarter are 10 and 15 years (2020 - 10 years).

10.    ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities are comprised of the following:


September 30, 2021

December 31, 2020

Trade payables

$

184,448

$

137,016

Deferred rental income


1,317


854

Supplier payables with extended terms


18,721


23,493

Payroll, bonuses and incentives


39,362


26,204

Accrued liabilities


45,215


44,159

Accounts payable and accrued liabilities

$

289,063

$

231,726

Supplier payables with extended terms relate to equipment purchases from suppliers with payment terms ranging anywhere from approximately 60 days to 8 months.

11.    PROVISIONS AND CONTINGENCIES


Restructuring

Warranties

Other

Total

Provisions, December 31, 2020

$

3,752

$

1,074

$

2,134

$

6,960

Charge for the period



7,694


1,590


9,284

Utilized in the period


(2,435)


(7,419)


(1,367)


(11,221)

Provisions, September 30, 2021

$

1,317

$

1,349

$

2,357

$

5,023










Current portion

$

1,317

$

1,349

$

2,141

$

4,807

Non-current portion




216


216

Total

$

1,317

$

1,349

$

2,357

$

5,023

Contingencies
In the ordinary course of business, the Corporation is contingently liable for various amounts that could arise from litigation, environmental matters or other sources. The Corporation does not expect the resolution of these matters to have a materially adverse effect on its financial position or results of operations. Provisions have been made in these unaudited condensed consolidated interim financial statements when the liability is expected to result in an outflow of economic resources, and where the obligation can be reliably measured.

12.    LEASE LIABILITIES AND LEASE RECEIVABLES

As lessee
The Corporation leases properties for its branch network, certain vehicles, machinery and IT equipment.

The change in lease liabilities is as follows:



Three months ended
September 30

Nine months ended
September 30


Note

2021

2020

2021

2020

Balance at beginning of period


$

163,421

$

140,143

$

153,033

$

127,130

Changes from operating cash flows









Finance costs paid on lease liabilities



(1,857)


(1,906)


(5,863)


(6,213)

Changes from financing cash flows









Payment of lease liabilities



(7,012)


(6,070)


(21,068)


(16,727)

Other changes









Acquisition of business

4


348



6,076


13,250

Interest expense

20


1,857


1,906


5,863


6,213

New leases, net of disposals



10,653


16,987


29,369


27,407

Balance at end of period


$

167,410

$

151,060

$

167,410

$

151,060

Current portion


$

27,645

$

23,586

$

27,645

$

23,586

Non-current portion


$

139,765

$

127,474

$

139,765

$

127,474

Not included in the balance of lease liabilities are short-term leases, leases of low-value assets and variable lease payments not linked to an index. Variable lease payments, lease payments associated with short-term leases and leases of low-value assets are expensed as incurred in the condensed consolidated interim statements of earnings.

As lessor

Operating leases
The Corporation rents equipment to customers under rental agreements with terms of up to 5 years. The rentals have been assessed and classified as operating leases. Revenue is presented as equipment rental revenue and recognized evenly over the term of the rental agreement.

Finance leases

The Corporation subleases certain equipment to customers. The Corporation assesses and classifies its subleases as finances leases, and therefore derecognizes the right-of-use assets relating to the respective head leases, recognizes lease receivables equal to the net investment in the subleases, and retains the previously recognized lease liabilities in its capacity as lessee.

13.    EMPLOYEE BENEFITS

The Corporation sponsored three pension plans: the Wajax Limited Pension Plan (the "Employees' Plan") which, except for a small group of employees in a defined benefit plan, is a defined contribution plan, and two defined benefit plans: the Pension Plan for Executive Employees of Wajax Limited (the "Executive Plan") and the Wajax Limited Supplemental Executive Retirement Plan (the "SERP"). Effective December 31, 2019, the Employees' Plan was wound up, which was comprised of both defined benefit and defined contribution components. Benefit accruals under the plan were frozen effective as of such date and all active members joined a new defined contribution plan sponsored by the Corporation, the Wajax Limited Defined Contribution Pension Plan (the "DC Plan").

During the second quarter of 2021, the Corporation settled benefit obligations and plan assets as part of the wind-up of the Employees' Plan effective December 31, 2019. The settlement was completed by entering into an agreement with a third party insurance company to purchase an annuity for participants who selected that an annuity be purchased on their behalf, and by paying commuted values to participants who selected a lump sum payout. The cost of the annuity purchase totaled $4,396 and was funded with existing plan assets. For those participants who selected a lump sum settlement, the total lump sum paid was $2,610, which was also paid from existing plan assets. As a result of the settlement, the Employees' Plan assets and benefit obligation declined by $7,006 and $7,123, respectively, resulting in a gain on settlement of $117 that the Corporation recorded in the condensed consolidated interim statements of earnings during the second quarter.

In addition, the settlement triggered a June 30, 2021 re-measurement of the Employees Plan for any pre-settlement changes in assumptions, plan asset return experience and other experience adjustments, resulting in a re-measurement loss of $142, net of tax, recognized in other comprehensive income during the second quarter in the condensed consolidated interim statements of comprehensive income.

14.    DEBENTURES

Senior Unsecured Debentures - 6%, due January 15, 2025
In December 2019, the Corporation issued $57,000 in unsecured subordinated debentures with a term of five years due January 15, 2025. These debentures bear a fixed interest rate of 6.00% per annum, payable semi-annually on January 15 and July 15 of each year, commencing July 15, 2020.

The debentures will not be redeemable before January 15, 2023, except upon the occurrence of a change of control of the Corporation in accordance with the terms of the indenture governing the debentures. On or after January 15, 2023, but prior to January 15, 2024, the debentures are redeemable, in whole at any time or in part from time to time at the option of the Corporation at a price equal to 103% of the principal amount redeemed plus accrued and unpaid interest. On or after January 15, 2024, but prior to the maturity date of January 15, 2025, the debentures are redeemable at a price equal to their principal amount plus accrued and unpaid interest.

On redemption or at maturity on January 15, 2025, the Corporation has the option to repay the debentures in either cash or freely tradable voting shares of the Corporation.

The debentures are classified as a financial liability and are initially recorded at fair value net of transaction costs. The debentures are measured subsequently at amortized cost using the effective interest method over the life of the debentures.

The following balances were outstanding:


September 30, 2021

December 31, 2020

Debentures issued

$

57,000

$

57,000

Deferred financing costs, net of accumulated amortization


(1,928)


(2,362)

Total debentures

$

55,072

$

54,638

Movements in the debentures balance are as follows:


Three months ended
September 30

Nine months ended
September 30


2021

2020

2021

2020

Balance at beginning of period

$

54,925

$

54,356

$

54,638

$

54,115

Changes from financing cash flows









Transaction costs related to issuance





(37)

Other changes









Amortization of deferred financing costs


147


138


434


416

Balance at end of period

$

55,072

$

54,494

$

55,072

$

54,494

Finance costs on the debentures were $1,014 during the quarter (2020 - $1,015) and $2,987 year to date (2020 - $2,994).

15.    LONG-TERM DEBT

On January 22, 2021, the Corporation utilized the $50,000 non-revolving acquisition term facility to finance the acquisition of Tundra. The remaining cash portion of the purchase price was financed with the revolving term facility.

Borrowings under the bank credit facility bear floating rates of interest at margins over Canadian dollar bankers' acceptance yields, U.S. dollar LIBOR rates or prime. Margins on the facility depend on the Corporation's leverage ratio at the time of borrowing and range between 1.5% and 3.0% for Canadian dollar bankers' acceptances and U.S. dollar LIBOR borrowings, and 0.5% and 2.0% for prime rate borrowings under the non-revolving and revolving term facilities. Margins on the non-revolving acquisition term facility range between 1.7% and 3.3% for Canadian dollar bankers' acceptances and U.S. dollar LIBOR borrowings, and 0.7% and 2.3% for prime rate borrowings.

Borrowing capacity under the bank credit facility is dependent upon the level of the Corporation's inventory on hand and the outstanding trade accounts receivable. As at September 30, 2021, borrowing capacity under the bank credit facility was $450,000 (December 31, 2020 - $438,710), of which $322,613 (December 31, 2020 - $209,296) was accessible to the Corporation. In addition, the bank credit facility contains customary restrictive covenants including limitations on the declaration of cash dividends and an interest coverage maintenance ratio, all of which were met as at September 30, 2021.

The following balances were outstanding:


September 30, 2021

December 31, 2020

Bank credit facility



         Non-revolving term portion

$

50,000

$

50,000

         Non-revolving acquisition term portion


50,000


         Revolving term portion


20,067


122,991


$

120,067

$

172,991

Deferred financing costs, net of accumulated amortization


(1,383)


(1,411)

Total long-term debt

$

118,684

$

171,580

The Corporation had $7,320 (December 31, 2020 - $6,423) letters of credit outstanding at the end of the period. Finance costs on long-term debt amounted to $1,709 during the quarter (2020 - $2,268) and $5,944 year to date (2020 - $7,809). Movements in the long-term debt balance are as follows:


Three months ended
September 30

Nine months ended
September 30


2021

2020

2021

2020

Balance at beginning of period

$

148,667

$

 

217,125

$

171,580

$

225,573

Changes from financing cash flows









Net repayments of borrowings


(30,129)


(18,596)


(52,924)


(27,232)

Transaction costs related to borrowings




(393)


Other changes









Amortization of deferred financing costs


146


95


421


283

Balance at end of period

$

118,684

$

198,624

$

118,684

$

198,624

16.    FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

The Corporation uses the following fair value hierarchy for determining and disclosing the fair value of financial instruments:

  • Level 1 - unadjusted quoted prices in active markets for identical assets or liabilities.
  • Level 2 - other techniques for which all inputs that have a significant effect on the recorded fair value are observable, either directly or indirectly.
  • Level 3 - techniques that use inputs that have a significant effect on the recorded fair value that are not based on observable market data.

The Corporation categorizes its financial instruments as follows:


September 30, 2021

December 31, 2020




Financial assets measured at amortized cost:



Cash

$

6,880

$

6,625

Trade and other receivables


221,654


214,507

    Contract assets


46,129


23,003

    Lease receivables


9,709


7,159






Financial liabilities measured at amortized cost:





Accounts payable and accrued liabilities


289,063


231,726

Provisions


5,023


6,960

Contract liabilities


12,515


7,064

Dividends payable


5,352


5,008

Other liabilities


2,893


2,365

Lease liabilities


167,410


153,033

Debentures


55,072


54,638

Long-term debt


118,684


171,580






Net derivative financial assets (liabilities) measured at fair value:





Foreign exchange forwards


1,385


(710)

Total return swaps


2,322


(578)

Interest rate swaps


(4,175)


(8,276)

The Corporation measures non-derivative financial assets and financial liabilities at amortized cost. Derivative financial assets/liabilities are recorded on the condensed consolidated interim statements of financial position at fair value. Changes in fair value are recognized in the condensed consolidated interim statements of earnings except for changes in fair value related to derivative financial assets/liabilities which are effectively designated as hedging instruments which are recognized in other comprehensive income. The Corporation's derivative financial assets/liabilities are held with major Canadian chartered banks and are deemed to be Level 2 financial instruments. The fair value of long-term debt approximates its recorded value due to its floating interest rate. The fair value of lease receivables approximates its carrying value. The fair value of the debentures can be estimated based on the trading price of the debentures, which takes into account the Corporation's own credit risk. At September 30, 2021, the Corporation has estimated the fair value of its debentures to be $58,995. The fair values of all other financial assets and liabilities, other than lease liabilities, approximate their recorded values due to the short-term maturities of these instruments.

Derivative financial instruments and hedges
The interest rate swaps are designated as effective hedges and are measured at fair value with subsequent changes in fair value recorded in other comprehensive income. Amounts in accumulated other comprehensive income are reclassified to net earnings in the periods when the hedged item affects profit or loss. The Corporation recognized a gain of $513 during the quarter (2020 - gain of $246) and a gain of $2,998 year to date (2020 - loss of $4,561), net of tax in other comprehensive income associated with its interest rate swaps.

The Corporation's interest rate swaps outstanding are summarized as follows:


Notional
Amount

Weighted
Average
Interest Rate

Maturity

As at September 30, 2021:

$

150,000

2.12%

November 2024

As at December 31, 2020:

$

150,000

2.12%

November 2024

As at September 30, 2020:

$

150,000

2.12%

November 2024

The Corporation enters into short-term foreign exchange forwards to hedge the exchange risk associated with the cost of certain inbound inventory and certain foreign currency-denominated sales to customers along with the associated receivables as part of its normal course of business. Foreign exchange forwards are initially recognized on the date the derivative contract is entered into and are subsequently re-measured at their fair values. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument. In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging derivative, net of taxes, is recognized in other comprehensive income while the ineffective portion is recognized within net earnings. Amounts in accumulated other comprehensive income are reclassified to net earnings in the periods when the hedged item affects profit or loss.  The Corporation recognized a loss of $605 in the quarter (2020 - gain of $220) and a loss of $252 year to date (2020 - gain of $133) associated with its foreign exchange forwards in the condensed consolidated interim statements of earnings, and a gain of $1,038 in the quarter (2020 - loss of $364) and a gain of $1,715 year to date (2020 - loss of $76), net of tax in other comprehensive income.

The Corporation's contracts to buy and sell foreign currencies are summarized as follows:

September 30, 2021


Notional
Amount

Average
Exchange
Rate

Maturity

Purchase contracts

US$

98,391

1.2477

October 2021 to January 2024


498

1.4994

October 2021 to December 2022

Sales contracts

US$

34,119

1.2515

October 2021 to April 2023


1,023

1.5101

October 2021 to December 2022

 

December 31, 2020


Notional
Amount

Average
Exchange
Rate

 

Maturity

Purchase contracts

US$

45,912

1.3236

January 2021 to December 2022


102

1.5790

October 2021 to December 2022

Sales contracts

US$

32,187

1.3233

January 2021 to December 2022


939

1.5591

January 2021 to December 2022

 

September 30, 2020


Notional
Amount

Average
Exchange
Rate

 

Maturity

Purchase contracts

US$

41,295

1.3617

October 2020 to August 2021


29

1.5685

October 2020

Sales contracts

US$

28,978

1.3449

October 2020 to June 2022


981

1.5565

November 2020 to September 2021

The Corporation has certain total return swaps to hedge the exposure associated with increases in its share price on its outstanding restricted share units ("RSUs"). The Corporation does not apply hedge accounting to these relationships and as such, gains and losses arising from marking these derivatives to market are recognized in earnings in the period in which they arise. As at September 30, 2021, the Corporation's total return swaps cover 390,000 of the Corporation's underlying common shares (December 31, 2020 - 387,000), and expire between March 2022 and March 2024. During the year to date, the Corporation settled a total return swap contract for 114,000 shares (2020 - 121,000 shares), resulting in a cash payout of $613 (2020 - $1,396). The Corporation recognized a loss of $420 in the quarter (2020 - gain of $1,366) and a gain of $2,287 year to date (2020 - loss of $1,032) associated with its total return swaps.

Derivative financial assets consist of:


September 30, 2021

December 31, 2020

Interest rate swaps

$

127

$

Foreign exchange forwards


2,290


1,652

Total return swaps


2,322


456

Total derivative financial assets

$

4,739

$

2,108






Current portion

$

2,964

$

1,597

Non-current portion

$

1,775

$

511

Derivative financial liabilities consist of:


September 30, 2021

December 31, 2020

Interest rate swaps

$

4,302

$

8,276

Foreign exchange forwards


905


2,362

Total return swaps



1,034

Total derivative financial liabilities

$

5,207

$

11,672






Current portion

$

740

$

3,387

Non-current portion

$

4,467

$

8,285

Movements in the net derivative financial liabilities balance are as follows:


Three months ended
September 30

Nine months ended
September 30


2021

2020

2021

2020

Opening net derivative financial liabilities

$

1,566

$

13,778

$

9,564

$

6,507

Loss (gain) recognized in net earnings


1,025


(1,586)


(2,035)


899

(Gain) loss recognized in other comprehensive income - before tax


(2,123)


161


(6,448)


6,343

Cash paid on settlement of total return swaps




(613)


(1,396)

Ending net derivative financial liabilities

$

468

$

12,353

$

468

$

12,353

The balance in accumulated other comprehensive loss relates to changes in the value of the Corporation's various interest rate swaps and foreign exchange forwards where hedge accounting is applied. These accumulated amounts will be continuously released to the condensed consolidated interim statements of earnings within finance costs and gross profit, respectively.

During the periods presented and cumulatively to date, changes in counterparty credit risk have not significantly contributed to the overall changes in the fair value of these derivative instruments.

17.    SHARE CAPITAL AND EARNINGS PER SHARE

The Corporation is authorized to issue an unlimited number of no par value common shares and an unlimited number of no par value preferred shares. Each common share entitles the holder of record to one vote at all meetings of shareholders. All issued common shares are fully paid. There were no preferred shares outstanding as at September 30, 2021 (December 31, 2020 - nil). Each common share represents an equal beneficial interest in any distributions of the Corporation and in the net assets of the Corporation in the event of its termination or winding-up.


Number of
Common
Shares

Amount

Issued and outstanding, December 31, 2020

20,167,703

$

182,482

Common shares issued for acquisition of business

1,357,142


25,256

Common shares issued to settle share-based compensation plans

6,583


67

Issued and outstanding, September 30, 2021

21,531,428

$

207,805

Shares held in trust, December 31, 2020

(134,084)


(1,208)

Released for settlement of certain share-based compensation plans

11,979


108

Shares held in trust, September 30, 2021

(122,105)

$

(1,100)

Issued and outstanding, net of shares held in trust, September 30, 2021

21,409,323

$

206,705

 


Number of
Common
Shares

Amount

Issued and outstanding, December 31, 2019 and September 30, 2020

20,167,703

$

182,482

Shares held in trust, December 31, 2019

(156,113)


(1,407)

Released for settlement of certain share-based compensation plans

22,029


199

Shares held in trust, September 30, 2020

(134,084)

$

(1,208)

Issued and outstanding, net of shares held in trust, September 30, 2020

20,033,619

$

181,274

Dividends declared

During the three months ended September 30, 2021, the Corporation declared cash dividends of $0.25 per share or $5,352 (2020 - dividends of $0.25 per share or $5,008). During the nine months ended September 30, 2021, the Corporation declared cash dividends of $0.75 per share or $16,056 (2020 - dividends of $0.75 per share or $15,024). As at September 30, 2021, the Corporation had $5,352 (December 31, 2020 - $5,008) dividends outstanding which were paid on October 5, 2021.

Earnings per share

The following table sets forth the computation of basic and diluted earnings per share:


Three months ended
September 30

Nine months ended
September 30


2021

2020

2021

2020

Numerator for basic and diluted earnings per share:





– net earnings

$

14,657

$

6,671

$

45,278

$

20,937

Denominator for basic earnings per share:









– weighted average shares, net of shares held in trust


21,409,323


20,033,619


21,300,718


20,027,910

Denominator for diluted earnings per share:









– weighted average shares, net of shares held in trust


21,409,323


20,033,619


21,300,718


20,027,910

– effect of dilutive share rights


665,847


479,712


636,355


431,951

Denominator for diluted earnings per share


22,075,170


20,513,331


21,937,073


20,459,861

Basic earnings per share

$

0.68

$

0.33

$

2.13

$

1.05

Diluted earnings per share

$

0.66

$

0.33

$

2.06

$

1.02

For the quarter, the calculation above excludes nil (2020 - 74,374) anti-dilutive share rights. For the year to date, the calculation above excludes 6,594 anti-dilutive share rights (2020 – 126,366).

18.    SHARE-BASED COMPENSATION PLANS

The Corporation has four share-based compensation plans: the Wajax Share Ownership Plan (the "SOP"), the Directors' Deferred Share Unit Plan (the "DDSUP"), the Mid-Term Incentive Plan for Senior Executives (the "MTIP") and the Deferred Share Unit Plan (the "DSUP"). The following table provides the share-based compensation expense for awards under all plans:


Three months ended
September 30

Nine months ended
September 30


2021

2020

2021

2020

Treasury share rights plans





SOP equity-settled

$

24

$

24

$

71

$

65

DDSUP equity-settled


185


123


496


397

Total treasury share rights plans expense

$

209

$

147

$

567

$

462

Market-purchased share rights plans








MTIP equity-settled

$

403

$

425

$

1,131

$

1,218

DSUP equity-settled


6


12


22


39

Total market-purchased share rights plans expense

$

409

$

437

$

1,153

$

1,257

Cash-settled rights plans








MTIP cash-settled

$

955

$

909

$

3,783

$

999

DSUP cash-settled


3


34


72


(16)

Total cash-settled rights plans expense

$

958

$

943

$

3,855

$

983

Total share-based compensation expense

$

1,576

$

1,527

$

5,575

$

2,702

a) Treasury share rights plans

Under the SOP and the DDSUP, rights are issued to the participants which are settled by issuing Wajax Corporation shares for no cash consideration. Rights under the SOP vest over three years, while rights under the DDSUP vest immediately. Vested rights are settled when the participant is no longer employed by the Corporation or one of its subsidiary entities or no longer sits on its Board. Whenever dividends are paid on the Corporation's shares, additional rights (dividend equivalents) with a value equal to the dividends are credited to the participants' accounts.

The following rights under these plans are outstanding:


Number of rights

Fair value at time of grant

Outstanding at December 31, 2020

482,224

$

6,626

Grants    – new grants

22,777

496

               – dividend equivalents

18,381

Settlements

(6,583)

(67)

Outstanding at September 30, 2021

516,799

$

7,055

At September 30, 2021, 486,931 share rights were vested (December 31, 2020 - 453,466 share rights were vested).

The outstanding aggregate number of shares issuable to satisfy entitlements under these plans is as follows:


Number of Shares

Approved by shareholders

1,300,000

Exercised to date

(359,394)

Rights outstanding

(516,799)

Available for future grants at September 30, 2021

423,807

b) Market-purchased share rights plans

The MTIP plan consists of cash-settled restricted share units ("RSUs") and equity-settled performance share units ("PSUs"), and the equity-settled DSUP plan consists of deferred share units ("DSUs").

Market-purchased share rights plans consist of PSUs under the MTIP plan and DSUs, which vest over three years and are settled in common shares of the Corporation on a one-for-one basis. DSUs are only subject to time-vesting, whereas PSUs are also subject to performance vesting. PSUs are comprised of two components: return on net assets ("RONA") PSUs and total shareholder return ("TSR") PSUs as described below:

  • RONA PSUs vest dependent upon the attainment of a target level of return on net assets. Such performance vesting criteria results in a performance vesting factor that ranges from 0% to 150% depending on the level of RONA attained.
  • TSR PSUs vest dependent upon the attainment of a TSR market condition. Such performance vesting criteria result in a performance vesting factor that ranges from 0% to 200% depending on the Corporation's TSR relative to a pre-selected group of peers.

These plans are settled through shares purchased on the open market by the employee benefit plan trust, subject to the attainment of their vesting conditions. PSUs are settled at the end of the vesting period, and the number of shares remitted to the participant upon settlement is equal to the number of PSUs awarded multiplied by the performance vesting factor less shares withheld to satisfy the participant's withholding tax requirement. DSUs are settled when the participant is no longer employed by the Corporation or one of its subsidiary entities. Whenever dividends are paid on the Corporation's shares, additional rights with a value equal to the dividends are credited to the participants' accounts with the same vesting conditions as the original PSUs and DSUs.

The following rights under these plans are outstanding:


Number of rights

Fair value at time of grant

Outstanding at December 31, 2020

289,570

$

5,434

Grants    – new grants

74,959

1,874

               – dividend equivalents

11,264

Forfeitures

(52,497)

(1,043)

Settlements

(25,539)

(771)

Outstanding at September 30, 2021

297,757

$

5,494

At September 30, 2021, 25,811 outstanding rights were vested (December 31, 2020 - 21,004 rights were vested). All vested rights are DSUs.

c) Cash-settled rights plans

Cash-settled rights plans consist of MTIP RSUs and cash-settled DSUs. Compensation expense varies with the price of the Corporation's shares and is recognized over the three year vesting period. RSUs are settled at the end of the vesting period, whereas DSUs are settled when the participant is no longer employed by the Corporation or one of its subsidiary entities. Whenever dividends are paid on the Corporation's shares, additional rights with a value equal to the dividends are credited to the participants' accounts with the same vesting conditions as the original rights. The value of the payout is equal to the number of rights awarded including earned dividend equivalents, multiplied by the volume weighted average share price at the time of vesting. At September 30, 2021, the carrying amount of the liabilities for these plans was $5,391 (December 31, 2020$3,863).

The following rights under these plans are outstanding:


Number of rights

Outstanding at December 31, 2020

465,452

Grants    – new grants

174,652

               – dividend equivalents

18,895

Forfeitures

(38,654)

Settlements

(112,096)

Outstanding at September 30, 2021

508,249

At September 30, 2021, 10,574 outstanding rights were vested (December 31, 2020 - 10,182 rights were vested).

19.    REVENUE

Disaggregation of revenue

In the following table, revenue is disaggregated by revenue type:


Three months ended September 30

Nine months ended September 30


2021

2020

2021

2020

Equipment sales

$

104,710

$

106,180

$

364,451

$

326,418

Product support

114,267

100,938

334,831

309,840

Industrial parts

111,061

83,772

329,406

257,059

ERS

62,101

41,676

179,821

123,774

Revenue from contracts with customers

$

392,139

$

332,566

$

1,208,509

$

1,017,091

Equipment rental

9,166

8,054

25,995

24,538

Total

$

401,305

$

340,620

$

1,234,504

$

1,041,629

The Corporation has included $5,052 during the quarter (2020 - $4,730) and $12,652 year to date (2020 - $12,363) in equipment sales related to short-term rental contracts that are expected to convert to equipment sales within a six to twelve month period.

20.    FINANCE COSTS

Finance costs are comprised of the following:



Three months ended
September 30

Nine months ended
September 30


Note

2021

2020

2021

2020

Finance costs on long-term debt

15

$

1,709

$

2,268

$

5,944

$

7,809

Finance costs on debentures

14

1,014

1,015

2,987

2,994

Interest expense on lease liabilities

12

1,857

1,906

5,863

6,213

Interest income on lease receivables


(56)

(51)

(167)

(109)

Finance costs


$

4,524

$

5,138

$

14,627

$

16,907

The Corporation capitalized nil during the quarter (2020 - nil) and $153 year to date (2020 - nil) of borrowing costs directly attributable to the construction of qualifying assets.

21.    INCOME TAX EXPENSE

Income tax expense comprises current and deferred tax as follows:

For the nine months ended September 30

2021

2020

Current income tax expense

$

14,163

$

8,505

Deferred income tax expense (recovery)

2,902

(603)

Income tax expense

$

17,065

$

7,902

The calculation of current tax is based on a combined federal and provincial statutory income tax rate of 26.2% (2020 – 26.5%). Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax assets and liabilities have been measured using an expected average combined statutory income tax rate of 26.2% based on the tax rates in years when the temporary differences are expected to reverse.

The reconciliation of income taxes at Canadian statutory rates to the reported income tax expense is as follows:

For the nine months ended September 30

2021


2020


Combined statutory income tax rate

26.2

%

26.5

%

Expected income tax expense at statutory rates

$

16,334


$

7,642


Non-deductible expenses

395


399


Non-taxable portion of gain on real estate disposal

(1,205)


(212)


Other

1,541


73


Income tax expense

$

17,065


$

7,902


22.    CHANGES IN NON-CASH OPERATING WORKING CAPITAL

The net change in non-cash operating working capital comprises the following:


Three months ended
September 30

Nine months ended
September 30


2021

2020

2021

2020

Trade and other receivables

$

(11,149)

$

(82)

$

10,360

$

36,219

Contract assets

(5,561)

(2,984)

(15,175)

2,530

Inventory

5,577

29,626

4,264

26,181

Deposits on inventory

2,589

(2,040)

32,757

(8,470)

Prepaid expenses

(1,062)

(416)

(2,713)

(679)

Accounts payable and accrued liabilities

18,049

(13,590)

36,661

(53,774)

Provisions

(680)

6,327

(1,937)

5,664

Contract liabilities

1,742

127

5,231

(2,025)

Total

$

9,505

$

16,968

$

69,448

$

5,646

23.    GOVERNMENT ASSISTANCE

Canada Emergency Wage Subsidy

On April 11, 2020, the Government of Canada passed the Canada Emergency Wage Subsidy ("CEWS") to support employers facing financial hardship as measured by certain revenue declines as a result of the COVID-19 pandemic. The CEWS currently provides eligible businesses with a reimbursement of compensation expense for the period from March 15, 2020 to September 25, 2021 of up to 75% of eligible employees' employment remuneration, subject to certain criteria. The Corporation applied for the CEWS for the period from March 15, 2020 to June 5, 2021 to the extent it met the requirements to receive the subsidy. In accordance with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, during the third quarter, the Corporation recognized nil (2020 - $5,425) as a reimbursement of compensation expense, with nil (2020 - $2,648) and nil (2020 - $2,777) allocated to cost of sales and selling and administrative expenses, respectively, in proportion to personnel costs recorded in those areas. During the year to date, the Corporation recognized $8,448 (2020 - $20,933) as a reimbursement of compensation expense, with $3,723 (2020 - $9,731) and $4,725 (2020 - $11,202) allocated to cost of sales and selling and administrative expenses, respectively, in proportion to personnel costs recorded in those areas. As at September 30, 2021, the entire $8,448 current year subsidy has been received from the Government of Canada.

The Government of Canada announced that it would be extending the CEWS program until October 23, 2021. The Corporation will continue to monitor its eligibility for the subsidy.

24.    COMPARATIVE INFORMATION

Certain comparative information has been reclassified to conform to the current year's presentation.

25.    SUBSEQUENT EVENTS

On November 1, 2021, the Corporation declared a fourth quarter 2021 dividend of $0.25 per share or $5,352.

SOURCE Wajax Corporation

Copyright 2021 Canada NewsWire

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